Prior Acts and Tail Coverage After Buying a Business

Who pays is negotiated in the purchase agreement, not fixed by rule: in an asset deal the seller often buys a tail, and in a stock deal the company you now own usually keeps paying for its prior acts coverage. On claims-made policies, protection for the seller's past acts usually comes from prior acts coverage (a policy that keeps the old retroactive date, the earliest date of conduct it covers) or a tail (an extended reporting period on the seller's expiring policy). Either way, coverage applies only within that policy's terms and for the people it insures. This guide is for new owners of firms that carry professional liability, directors and officers (D&O), employment practices or cyber policies.

The short answer

A claims-made policy generally responds to claims made (and often reported) during the policy, but only about acts after its retroactive date (the earliest date of work or conduct the policy covers).
Prior acts coverage means a new or continuing policy keeps the old retroactive date, so it can respond to claims about pre-closing acts, subject to its terms and any exclusion for known claims. Whether a carrier offers it is an underwriting decision.
A tail (extended reporting period) adds time to report claims about acts before the policy ended. It does not cover anything done after closing.
In an asset deal, the seller often buys a tail on its own policies; that tail usually protects the seller's entity, not automatically yours.
Who pays for a tail, how long it runs and what it covers are negotiated in the purchase agreement. Settle them before closing if you can.

Which policies are claims-made, and why does that matter after a sale?

Most small business general liability is written on an occurrence basis: the policy in force when the injury or damage happened responds, whenever the claim arrives. Several other lines usually work differently. They are claims-made: the policy in force when the claim is made (and often reported) responds, as long as the act behind it came after the retroactive date. See occurrence vs claims-made.

Common claims-made policies and the pre-closing risk each carries
Policy	Pre-closing act that can lead to a later claim
Professional liability, also called errors and omissions (E&O)	A design, report, system build or piece of advice the seller delivered before closing
Directors and officers (D&O)	A decision by the seller as owner or director, such as how the business was run or how the sale was described
Employment practices liability insurance (EPLI)	A firing, harassment complaint or promotion decision made under the seller
Cyber	A breach that started before closing but was discovered after it
Claims-made general liability or pollution (less common)	Work or conditions before closing, depending on the form

Because a claims-made policy ends its protection when the policy ends, the moment of a sale is when coverage for the past is most likely to fall away. These policies are not standardized, so each one's change in control, retroactive date and tail terms must be read policy by policy.

How do you keep coverage for the seller's past acts?

A retroactive date removes coverage for claims about acts before that date, even if the claim is made while the policy is in force. A seller who renewed with one carrier for years may have a retroactive date a decade back. That old date is valuable, because it is what lets today's policy respond to a claim about a project from years ago, subject to its terms.

Insurers call this keeping full prior acts. How you do that depends on the deal:

Stock deal, same carrier. The company's policy continues, but many policies (most often directors and officers) have a change in control provision. After a merger, acquisition or change in voting control, many such policies switch to run-off: they keep covering pre-closing acts until the policy period ends but stop covering new acts. Some end coverage outright or require notice within a set time. Read the clause and give any notice it requires. If the policy switches to run-off, the company has no coverage for acts after closing until a new policy is in force, so bind one at closing and ask that it keep the existing retroactive date. When the run-off policy period ends, pre-closing acts need a run-off tail or a new policy that keeps the old retroactive date.
Stock deal, new carrier. Ask the new carrier to carry over the existing retroactive date. Check that the quote, and then the binder (the carrier's written confirmation that coverage is bound) and the issued policy, show it, rather than a retroactive date at the new policy's start.
Asset deal into a new entity. Your new company has no history, so a new policy often starts with a retroactive date at closing. Some carriers will cover a predecessor's prior acts, usually after reviewing the seller's claims and what was known at closing; others will not.

If your new policy's retroactive date is your closing date, any claim about the seller's work needs to be answered by the seller's tail, the purchase agreement or nothing.

What does a tail actually cover?

An extended reporting period (ERP), usually called a tail, is a set window after a claims-made policy ends during which a claim can still be reported and treated as if it had been made during the policy. Four limits matter:

It only covers the past. A tail responds to claims about acts before the policy ended. Nothing done after closing is covered by it.
Terms can change. A tail can carry different limits or exclusions than the expiring policy. Some directors and officers tails include a straddle exclusion that can remove coverage for a whole claim if it also involves conduct after closing. Read the tail endorsement, not just the expiring policy.
It protects the named insured on that policy. If the seller's entity buys a tail on its own policy, the tail usually protects the seller's entity and its insured people. If a client sues your new company as the successor, the seller's tail may not respond to you.
There is a deadline. Many policies let you buy a tail only within a short window, set in the policy, after it ends or is cancelled, and some do not offer one after cancellation for nonpayment. In many forms a tail also does not add a new limit; claims during the tail share what is left of the expiring policy's limit.

Tail length and price are set by each carrier's form. For directors and officers coverage after a sale, law firm guidance describes six years as a common run-off period, chosen to cover most statutes of limitation, though shorter options exist. Tails are usually priced as a multiple of the annual premium and paid once, up front. There is no standard price, so get the actual number from the carrier before you negotiate who pays. See tail coverage.

Who pays for the tail, and what do deals usually say?

There is no fixed rule. It is negotiated, and the answer usually tracks the structure.

Prior acts options and who usually pays
Option	What it covers	Protects / usually paid by	Watch for
Keep the existing policy (stock deal)	Pre-closing acts back to the existing retroactive date, and post-closing acts unless a change in control clause switches it to run-off	The acquired company and its insured people / the company, so economically the buyer after closing	Change in control clause switching it to run-off
New policy with full prior acts	Pre-closing and post-closing acts	The named insured on the new policy / the buyer, sometimes as a higher premium	Exclusions for known claims or circumstances
Seller's tail (ERP) on its expiring policy	Claims reported during the tail about acts before the policy ended	The seller's entity and its insured people / often the seller, or split, or reflected in price	Reduced limits, straddle exclusions, length too short, missed election deadline
Specific indemnity backed by an escrow or holdback	Losses the agreement defines, up to the cap	The buyer / funded from the seller's proceeds	Caps, survival periods, money released too soon

Questions to settle in the purchase agreement, with your deal counsel:

Which claims-made policies need a tail, for how long, and who pays.
Whether the buyer's company or its people can be added to the seller's tail, and whether the carrier will agree.
Whether the seller will give its carrier notice of known complaints or circumstances before the policy ends. A properly given notice can lock a later claim into the seller's policy. It complements a tail; it does not replace one.
Whether the indemnity covers claims about pre-closing work that insurance does not pay. See seller indemnities vs insurance.

How does this play out after a stock purchase?

A hypothetical example. A buyer acquires all the stock of a 50-person staffing firm. The firm's employment practices liability policy has a retroactive date six years back. It also has a change in control clause. After a sale, the policy covers only acts before closing, only until the policy period ends, and only if the insurer is told within 30 days. Nobody reads the clause, no notice is sent and no new policy is bound at closing.

Seven months later, with the policy period still running, a recruiter let go in month two files an age discrimination charge, and another former employee alleges harassment by a manager the year before the sale. The first claim is about a decision made after closing, which run-off does not cover. The second is about pre-closing conduct, but the carrier questions coverage because notice was missed. Had the policy period already ended, that claim would have needed a run-off tail. Had the buyer given notice and bound a new policy at closing that kept the six-year retroactive date, both claims would have had a policy to go to, subject to its terms. Figures and terms are illustrative.

What should you do in your first month?

List every claims-made policy the business has or had, with its retroactive date and the date it ends.
For a stock deal, read each change in control clause and give any notice it requires.
If a policy went into run-off, confirm a replacement policy was bound at closing and shows the old retroactive date.
For an asset deal, confirm what tails the seller bought, how long they run and whom they protect. Get copies of the tail endorsements. If a tail was promised but not yet bought, check the election deadline on each policy today.
Check the retroactive date on each of your new policies. If it is your closing date, decide whether to ask for prior acts at renewal.
Ask the seller to report any known complaints or threatened claims to its carrier before its policy ends.
Confirm the indemnity and holdback cover the gaps the policies leave.

For line-by-line detail, see professional liability, directors and officers, EPLI and cyber. A Morrow review can lay out each retroactive date and tail side by side so you can see where the gaps are.

Keep reading

Frequently asked questions

What is the difference between prior acts coverage and a tail?

Prior acts coverage is a policy that keeps an old retroactive date, so it can cover acts before it started as well as new ones, subject to its terms and any exclusion for known claims. A tail is extra time to report claims after a policy ends, and it only covers acts before that policy ended.

Does the seller's tail protect my company?

Usually it protects the seller's entity and its insured people, because they are the named insured on that policy. If a claimant sues your company as the successor, the tail may not respond. Ask whether your company can be included before closing.

How long should a tail be?

It depends on the line and the risk. For directors and officers coverage after a sale, six years is commonly described as standard, but shorter tails exist and other lines vary by carrier. Ask your deal counsel how long claims could realistically be brought.

How much does a tail cost?

There is no standard price. Tails are usually priced as a multiple of the expiring annual premium and paid in a single lump sum. Get the carrier's actual quote before you negotiate who pays.

My new policy's retroactive date is my closing date. Is that a problem?

It generally means the policy will not cover claims about acts before closing. That may be fine if the seller's tail, the purchase agreement and the seller's notice of known issues cover the past, but check those gaps and consider asking for prior acts at renewal.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Prior Acts and Tail Coverage After an Acquisition: Who Pays?