E&O Insights: Nothing Standard About Professional Liability

Typically, when looking to move an account from one carrier to another, you can count on some degree of similarity in policy forms. For the most part, a general liability policy with one standard company will look similar to the general liability policy with another standard carrier. While it is still key to carry out some analysis to identify any differences — and bring those differences to the customer’s attention — chances are the differences will be few. If looking to move a professional liability account from one carrier to another, it is critical to conduct this detailed analysis as the differences will be more extensive.

Let’s look at some more common differences.

Overall Form

Most (but not all) professional liability carriers provide this 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 (more on this shortly). While few professional liability coverages are written on an occurrence form, they do exist. Some professional liability coverages, also commonly called errors and omissions (E&O), are written on a claims-made and reported basis. The distinction here is that for coverage to apply, claims must be made and reported to the carrier in the same policy term.

Key Terms

Retroactive (or Retro) Date vs. Full Prior Acts — This extremely important concept will have a huge impact on whether a claim is valid. Using agents E&O in our example, for a claim to be valid the error committed by the agency, such as failure to put collision on a vehicle, must be after the retro date. If the error occurred before the retro date, no coverage would be provided.

The retro date is typically shown on the face of the policy. If the declarations sheet states “full prior acts” or “none” in the area where a retro date would be noted, there is no retro date and the insured is protected for errors made regardless of when they were committed.

If moving an account to another carrier and Carrier A is providing full prior acts, be certain Carrier B is providing full prior acts, too. If Carrier B requires a retro date, without further modifications, you could be exposing your client to a gap in coverage. There is a good chance the premium with Carrier B will be less since they are affording less coverage. Any time there is a difference in retro dates when you are considering moving an account, counsel your client to purchase a tail on the old policy to cover any coverage gaps.

Covered Activities — To provide professional liability, you must have a full understanding of the activities your specific client is handling. If you are considering moving your account to another carrier, compare the activities for which the policy provides coverage and then meet with your client to review to determine whether they perform any activities that would not be covered.

Definition of Insured — Differences in this area occur, so be certain to analyze the forms. Common gaps may include no coverage for: 1) former employees, 2) independent contractors, 3) leased or temporary staff or 4) boards of directors. Clarify any subtle differences now as they can have a significant impact on a claim down the road.

Exclusions — When reviewing policy forms, just because one form has 15 exclusions and the other form only has two does not necessarily make the one with two exclusions 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. Defense (unlimited) in addition to the limit of liability is the broadest.

Deductible — This may be on a loss-only basis or a combined basis. With loss-only coverage, the insured would not participate in any claims defense, litigation or claims-handling expenses associated with the claim. These would be handled by the carrier. Conversely, with a combined loss and expense deductible, the insured would participate in these expenses up to the deductible limit. Make sure your customer knows their obligation.

Extended Reporting Period — This is often called a “tail.” While virtually all claims-made policies contain this provision, this does not mean there is consistency among carriers as to the available options. Using agents as an example, if an agency sells its business to another agency, the seller would buy a tail. This 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 policies may only allow options up to three years, while some carriers may provide up to 10 years — or even an unlimited period.

Receipt of the Policy — When you send out/deliver policies, always advise your clients to review the policy to ensure everything is in order. Obviously, the agency should also review the policy to make sure it matches what was requested.

Why the Client Should Buy Tail Protection

As you will note after reading the following claim, the agent should have advised the real estate agent to buy a tail to protect him for claims subsequently made against him.

The agency’s client, a real estate agent, had a claims-made real estate professional liability policy which was non-renewed based on loss history. The real estate agent made a conscious decision not to replace the coverage due to pricing concerns as the premium would have been four times higher with a new carrier. He later changed his mind and procured a new claims-made policy with a retro date even with the new policy’s inception date.

The client was sued for a loss where the alleged wrongful act occurred during the period covered by the expired policy and prior to the new policy’s retro date. The new carrier disclaimed based on the retro date, and the client was forced to spend $211,000 defending himself. The agent never advised the client to purchase a “tail” for the old policy, which would have covered the loss had a tail been in place. In addition, the agent did not fully explain how the “newer” retro date would affect claims based on older wrongful acts. The claim against the agent was settled for $200,000.

Other Professionals

When one thinks of professional liability, oftentimes 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, speech pathologists, consultants, therapists and teachers — that have a professional liability exposure.

With many of these classes, the general liability carrier will include a professional liability exclusion as it is not their intent to protect that segment of the client’s business. This is a good indication that you should secure a professional liability proposal for their professional exposure.

Handling professional liability requires you to understand its uniqueness — the terms and the coverages. Undertaking this effort now can save you from an E&O claim later.

Pearsall, CPCU, ARM, is president of Pearsall Associates Inc., a risk management consulting firm specializing helping agents protect themselves. He is also a special consultant to the Utica National Agents E&O program. Phone: 315-768- 1534. E-mail: curtis@pearsallassociates.com.

Topics Carriers Agencies Claims