Tail Insurance

Tail insurance (also called extended reporting period coverage or ERP) is a type of insurance policy that extends coverage for claims arising from events that occurred before the policy's expiration date, even when those claims are made after the policy has expired. In M&A, tail insurance is most commonly associated with representations and warranties (R&W) insurance and directors and officers (D&O) liability insurance, both of which require tail coverage when a business is sold and the original insurance relationship ends.

Representations and warranties insurance tail coverage operates as follows: an R&W insurance policy covers losses arising from breaches of the seller's representations and warranties in the purchase agreement. The policy is "claims-made" — it covers claims made during the policy period, not claims arising from events during the policy period. At the end of the policy period, no new claims can be submitted — even if a breach was discovered within the policy period but not formally claimed before expiration. R&W tail coverage extends the claims-reporting window so that breaches discovered near the end of the policy period can still be claimed.

D&O tail coverage is critical for business sales. When a company is sold, the original directors and officers may be personally exposed to claims for decisions they made while in their leadership roles — claims that may emerge months or years after they've left the company. The company's D&O policy, which covered them while they served, typically expires with the change of control. A "tail" policy (typically 6 years) provides ongoing coverage for claims arising from their period of service, even after they've left the company.

For sellers in M&A transactions, purchasing D&O tail coverage before closing is an important personal protection. Legal claims against directors and officers — for breach of fiduciary duty, securities violations, employment practices, or other management decisions — can emerge post-closing from third parties who have no reason to care about the acquisition structure. Without tail coverage, former directors and officers are personally exposed for events that occurred while they served.

The cost of tail coverage varies by the underlying policy limits, the business's industry and claims history, and the coverage period. D&O tail premiums for SMB companies typically cost 150-300% of the annual policy premium for a 6-year tail. R&W insurance tails are typically included within the original R&W policy structure rather than as a separate purchase.