Tail insurance

Definition

Run-off cover a seller buys so claims filed after closing are still paid.

Why It Matters

Professional liability, employment practices and directors and officers policies are commonly claims-made, meaning they answer only while the policy is live, and general liability commonly is not. The day the seller cancels a claims-made policy, a customer suing over a job finished two years ago has nobody to bill except the business you now own. Who buys the tail, for how many years, and at whose cost is a purchase-agreement term, not an afterthought. It is cheap enough that a seller refusing to buy one is telling you something.

In numbers: A three-year tail on a $1M professional policy quoted at 200% of its $4,000 annual premium is an $8,000 line in the closing costs.