Professional Liability Insurance Primer
All professionals face the possibility of lawsuits if the advice or services they provide to clients fail to meet expectations and result in the client, or a third party, suffering a financial loss
Legal Liability for professional advice or services has been well established since the 1930s and insurance products were developed to address this risk.
Most insurers offering this type of insurance operate in a relatively standardized way. The risk is assessed or underwritten from the information contained in an application and supplementary materials. Rates for coverage are established from actuarial data of losses compiled by insurers, and these rates are applied to the applicant’s annual revenues or professional staff head count. Premiums are then modified to by reference to the individual risk characteristics described in the application, the amount of coverage (Limit of Liability), and self-assumed risk (deductible) selected by the applicant.
Professional liability insurance policies follow similar formats, although the order and style can change. The policy usually begins starts with a preamble describing, in specific terms, what is covered and who it is covered by (the insurer). Most policies contain a statement that coverage is written on a “claims-made” basis, which means that coverage only applies to claims made during the policy term. This contrasts with the “occurrence” policies used for general liability insurance and certain types of medical malpractice insurance.
The next section, definitions, contains an itemized list of terms used in the policy and what the insurer considers the terms to mean. Often these terms are highlighted in italics, bold font, or quotation marks throughout the policy. Careful evaluation of these terms is extremely important because the terms often dictate what and who is actually covered.
Immediately following the preamble is a section which describes the type of coverage and the limitations imposed on the coverage. It may include a description of how defense costs are handled by the policy (included or in addition to the limit of liability) and whether the deductible applies to the settlement amount of any claim and/or defense. Some insurers may deal with limit and deductible modificationin the declarations page
One of the most important sections of a professional liability policy is the exclusions. This is in essence a list of activities, types of claims, persons or situations that are specifically excluded by the policy. It is crucial to review these exclusions carefully and understand how they might apply to an individual’s practice. Common exclusions address fraud and illegal acts, conflict situations, high risk activities and risks that are better addressed by other types of insurance. Some exclusions are specific to the type of profession insured.
The final section of a professional liability policy is the conditions. They may include a description of the policy term, any geographical limitation, extended reporting period rights, matters pertaining to claims modification and disputes with the insurer and any broad limitation to coverage (eg. The exclusion of nuclear war and pollution risks). Many insurers include an officer’s signature at the end of this section.
In addition to the policy wording, there is usually a declarations page attached. This itemizes in a relatively easy to read format: the name and address of the insurer and insured; the period of coverage; the limit and deductible (sometimes with a description of how this is covered); the premium; and a list of endorsements attached to the policy. Certain declarations may require counter-signature by the insurer and/or agent, which usually appears at the end.
Whatever the format, careful review of the policy should be undertaken to ensure the coverage provided is exactly what was requested, and agreed to, by the professional.
Claims administration via professional liability insurance usually takes the form of the insurer hiring and attorney and paying for the defense of a lawsuit brought against the professional. Most insurers have on retainer specialist professional liability defense law firms, so it is important to liaise with an insurer before a professional commences defense of a suit. Certain insurers encourage early communication of any incident, situation or circumstance that may have the potential to develop into a lawsuit at some time in the future. This is extremely important because of the claims made nature of most professional liability policies and the fat the failure to advise the insurer of a claim may result in a denial of coverage.
Choosing a professional liability insurer is very important because financial strength, expertise and knowledge of risk, efficient claims administration and commitment to the class of insurance may have a positive or negative effect on the successful outcome of a claim. Employing the knowledge and resources of a specialist insurance professional is extremely helpful in the insurer evaluation process.
There are a number of books and publications that might be helpful to the understanding. Please contact Rickard Jorgensen on Ext. 100 for details.