A variety of firms and many different professions are vulnerable to professional liability exposures, or “errors and omissions” claims. Lawsuits resulting from services rendered can be costly to both your bottom line and to your firm’s reputation.
“Almost any firm that charges a fee for its services has a professional liability exposure,” says Paul D. Maxwell, a senior account executive at Aon Risk Services Central, Inc.
Smart Business spoke with Maxwell about how to protect your company from these exposures and the lawsuits that follow.
What types of firms need professional liability coverage?
Many people are familiar with the medical professional liability exposures associated with doctors, nurses, hospitals and other health care providers. However, other professions, such as accountants, architects, engineers, attorneys, insurance agents and brokers, real estate agents and brokers, and stockbrokers, may also face significant professional liability claims. In addition, property management companies, financial institutions, insurance companies and project managers may face claims or lawsuits arising out of the work they perform on behalf of clients.
Is the coverage that a doctor or hospital purchases similar to the coverage of a financial institution?
There are some similarities, yet there are also significant differences. For example, the professional liability policy for a doctor or hospital usually covers a ‘medical incident’ — any act or omission arising out of the providing of, or a failure to provide, professional medical, dental or other health care services.
The professional liability policy for a financial institution, however, usually covers a ‘wrongful act,’ typically defined as any actual or alleged negligent act, error, omission, misleading statement, or breach of duty committed by the insured. Professional liability policies protect the insured against claims that allege that they and/or their employees committed errors or omissions.
Is coverage standard from carrier to carrier?
No. The policy forms may differ greatly. Because of this, it is important to work with an insurance professional who understands the nuances of the different forms.
The key areas that your insurance broker should understand and evaluate are coverage triggers, exclusions, claim reporting requirements, representations or warranties, settlement clauses and definitions of key terms.
If the insured and the insured’s broker do not fully understand the policy, there may be issues when a claim occurs. If the insured does not comply with the provisions of the policy, coverage may be jeopardized at the time of a claim.
Is the coverage trigger similar to that of a general liability policy?
Most general liability policies are triggered when the claim or incident occurs. This means that the claim or incident is covered by the policy in force when the incident happened.
Most professional liability policies are triggered when the claim is made against the insured. This claims-made basis means that the claim is covered by the policy in force when the insured is notified of the claim, which could be long after the incident occurred.
Typically, professional liability policies require the claim to be reported to the insurance company during the same policy period in which the insured was first notified of the claim. This makes timely reporting of claims imperative.
In addition, the alleged incident must have occurred after any retroactive date declared in the policy. If the insured does not comply with the reporting requirements or the alleged incident occurred prior to the retroactive date, the insured’s policy may not respond.
Do the strict requirements of a claims-made policy create issues when changing insurers?
Yes. When an insured is contemplating moving professional liability coverage to a new insurer, continuity is extremely important.
There are three areas to consider. First, does the new carrier require a retroactive date? If so, does it match the date from the old insurance carrier? Second, is there a pending or prior litigation exclusion date? If so, does it match the pending and prior litigation date from the old carrier? Lastly, what type of application is the new insurer requesting? Will it accept what is known as a ‘renewal’ application, or will it require a ‘main form’ application?
In the main form application, there are warranty provisions that require the insured to acknowledge any circumstance it knows about that could result in a future claim. If the insurance company can show that the insured breached the warranty and was aware of such a circumstance, the insurer could deny coverage at the time of loss.
If the new insurer will not grant continuity, the insured may invoke an extended reporting provision in the expiring policy. This allows the insured to purchase an extended reporting period (ERP), or ‘tail coverage’ to report claims-made during the ERP for circumstances that occurred during the expired policy period. For example, one firm is acquiring another and the insurer for the acquiring firm will only cover acts that occur after the acquisition. The firm being acquired may purchase tail coverage for a one-time premium that will allow the acquired firm to submit claims for circumstances that occurred during the previous policy period to its insurer during the ‘tail’ or ‘run-off’ period, usually three to six years.
How can business leaders determine if their firms have appropriate coverage?
The best way to make certain the professional liability coverage for your firm provides the right protection is to work with an insurance agent or broker who specializes in that type of coverage. Your agent or broker can work with your firm, obtain quotes from different insurers, analyze the programs offered and assist in structuring the professional liability program to best meet your needs.
Paul D. Maxwell is a senior account executive at Aon Risk Services Central, Inc. Reach him at (248) 936-5356 or email@example.com.