When placing coverage for your clients, with a fair degree of frequency your agency will need to look at placing professional liability — a/k/a errors and omissions — coverage for those risks. Typically, when thinking of professional liability, the following classes of professional business come to mind: real estate agents, lawyers, medical professionals, accountants and insurance agents. While these are some of the more common, there are more than 100 additional professional occupations — including appraisers, engineers, pharmacists, court reporters, pharmacists, funeral directors, speech pathologists, consultants, therapists and teachers — that have a professional liability exposure.
There are several ways to identify a possible professional liability. The most common is by using an Exposure Analysis Checklist. Actually placing the general liability coverage can also signal a professional liability need. With many of these classes, general liability carriers will include a professional liability exclusion as it is not their intent to protect that segment of the client’s business.
Once you have identified that there is a professional liability exposure, you need to look at placing the coverage or, at least, getting some proposals for your client to consider.
First and foremost, it is extremely important to realize that virtually no two E&O policies are the same. While ISO has a professional liability form, many carriers use their own independent filing to differentiate themselves in the marketplace.
The overall form — Carriers will typically write the coverage on a claims-made basis, meaning claims reported during the policy period are covered provided the actual error, which could have occurred months or years ago, was after any applicable retroactive date. Some carriers have modified this claims-made approach with a claims-made and reported form. The distinction here is that for coverage to apply, claims must be made and reported to the carrier in the same policy term. As you compare forms, be on the lookout for these key phrases.
The insuring agreement — Some carriers use an “indemnify” approach as opposed to “pay on behalf of.” The distinction is who pays the claim. An “indemnify” approach means your client needs to pay the claim and then will be reimbursed by the carrier. Since these claims have the potential to be significant, this may cause a tremendous hardship on your client. “Pay on behalf of” is preferred.
Retroactive (or Retro) Date vs. Full Prior Acts — This is crucial concept that will have a huge impact on whether a claim is valid. For a claim to be valid, the error (not when the claim is made) must be after the retro date. If the error occurred before the retro date, no coverage would be provided. The difference between a proposal with full prior acts and one with a current retro date could be as much as 40 percent, so when comparing various proposals, identify the retro date on each. If the client currently has professional liability, make sure you at least duplicate their retro date.
Covered activities — This is another common area where there may be differences. As a result, it is key that when providing professional liability you secure a complete understanding of the activities of your specific client. Your goal is to provide coverage for the activities your client performs, so review this area and note any differences.
Definition of insured — This is an often overlooked area. Typically, the differences between various carriers involve the following “insured” categories:
- Former employees
- Independent contractors
- Leased or temporary staff
- Boards of directors
Try to secure coverage for as many of these categories as possible. At claim time, the last thing your client wants to hear is that there is no coverage for the employee that made the error because he/she is no longer with the firm.
Exclusions — Not everything is covered and thus it is best to compare the exclusions and note any differences. A word of caution: just because something is not excluded does not mean there is coverage. If a form has 15 exclusions and the other form only has 2, this does not necessarily make the one with 2 the broader form. Sometimes, the goal with the carrier with 15 exclusions is to make very clear what is and what is not covered. This is not a bad approach as it helps remove any doubt up front.
Defense provision — Policies may be written with “Defense in addition to the Limit of Liability” or “Defense within the Limit of Liability.” If the defense is “within the limit,” any dollars spent defending the customer will impair (reduce) the limit available for any settlement/judgment. Since defense costs can be substantial, this could leave your client with insufficient dollars to pay a verdict. Defense (unlimited) in addition to the limit of liability is the broadest.
Plus, within the deductible feature it is important to note whether your client will have to pay any of the defense costs (a/k/a loss and expense deductible) or whether they will only have to pay the deductible if they are found to be liable. This is referred to as a Loss Only deductible.
Extended Reporting Period — This is often called a “tail.” While virtually all claims-made policies contain this provision, there is no consistency among carriers as to the available options. The “tail” provides an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. Some carriers may only provide a 1-year tail option, while others may offer up to 10 years — or even unlimited in some states. This may be an extremely important consideration if your client is considering selling or retiring from the business as the “tail” is the most common and effective means of providing coverage for possible future claims.
Enhancements — Many carriers include additional coverages that may or may not be of value to your client. As you do the comparison, these differences should be noted and brought to the client’s attention. They may heavily determine which coverage form is purchased. They may actually determine whether you get the account!
Punitive and exemplary damages — Since the awards in this area can be extremely high, check whether they are covered. Many carriers will cover them if permitted by that state, while some carriers may exclude them altogether.
Quality of claims counsel — This is invariably where the “rubber hits the road” —
and is an area that typically differentiates one carrier from another. Ask questions such as: How long has the carrier been handling the claims? What is their track record? What is the quality and expertise of the outside counsel they assign? Don’t find out at claims time that the carrier’s claims handling is subpar.
Chances are you have some accounts that have a professional liability exposure. It will be incumbent upon your agency to secure coverage for them. Since chances are none of the proposals will look alike, it will be critical to compare the coverages and note the differences. Providing your client with this checklist will enable them to make an educated decision while, at the same time, providing your agency will solid protection for your own errors and omissions.