Professional Liability Insurance is a specialty insurance that is not typically available from your neighborhood insurance agent. In fact, it’s an entirely separate insurance “genre” requiring specialized knowledge, relationships and familiarity with non-standardized policy forms. The following are 7 select tips to help you understand and choose the right professional liability insurance.
1) First Party vs Third Party Coverage
Professional Liability Insurance is third party coverage. Your typical insurances like Auto or Homeowner’s is first party coverage. With third party coverage, a claimant (third party) makes a claim (a demand for money or services) as a result of the Insured’s (first party) performance of or failure to perform professional services. Professional liability insurance policies are designed to primarily cover the economic or financial loss of the claimant and have a duty to defend the insured in an actual lawsuit or other demand for damages. The policies do provide some supplemental coverages that are first party like Disciplinary Proceedings Expense or Loss of Earnings benefits for attendance at trial or arbitration in the Insured’s legal malpractice action.
With Professional Liability Insurance, the insured’s liability (wrongdoing) doesn’t need to be proven to trigger coverage under the policy. It just has to be alleged. Some professional liability claims include allegations of fraud or other intentional or criminal acts for which there is no coverage under the policy, but only one covered act such as negligence (a tort law involving failure to exercise the care that a reasonably prudent person would show in a similar situation) is needed to trigger a legal defense under the policy.
2) Understand how Claims Made and Reported insurance operates
Professional liability insurance is mostly offered on a Claims Made policy form. More specifically, as Claims Made and Reported insurance meaning the claim or potential claim arising from a covered act must be both made and reported to the insurance company during the policy period first discovered, and the act or service must have been performed after the policy’s Retroactive Date. If there is no Retroactive Date associated with the policy, then it is said to provide full prior acts coverage. Claims Made and now Claims Made and Reported is the preferred approach for both the insureds and insurers when insuring professional liability exposures because:
- Final results by policy year are more predictable/ less volatile for insurers
- It’s usually easier to pin-point when a claim was made than when an occurrence takes place
- The policyholder can purchase coverage limits based on current exposures, reducing the chances of being underinsured later
- Easier to wall off prior firm exposure avoiding exposing multiple policies to the same claim
3) Ask an insurance professional for help
In today’s Internet driven, immediate response, 'Google-it' world, we think we can do the research and make a buying decision on just about anything in seconds and save money doing it, but not all insurance products, and especially professional liability insurance, are created equal. Sure, insurance departments watch insurance companies’ financial fitness and the policy forms used, but a consumer has to take the ultimate responsibility for knowing what they are purchasing.
A Professional Liability Insurance policy, after all, is there to ultimately protect your clients and your professional reputation. Specialized insurance brokers can advise you on the policy with the best value for your insurance needs and can help safeguard you against potential coverage gaps at zero-cost. More specifically, look for a broker that specializes in Professional Liability Insurance.
4) Look for an Insurance Company that has a track record and proven ability to manage insurance cycles
Historically, professional liability insurance has been very attractive to insurance companies because of the slow development (payout) of claims. Insurers can hold onto your premium dollar, and in times of economic inflation invest it for a tidy profit, sometimes for years, before it is needed to pay claims. Such times seem to bring a flock of new insurance companies into the marketplace fighting for market share. The competition drives rate levels down until the turning of next insurance cycle demands pricing adequacy. Those with the fortitude for it stay in, those unable to show a profit any longer, exit. When insurance companies exit the marketplace, turmoil in customer service and available claim handling resources ensue. That great deal you got on your premium may not be so great after all, if no one answers your phone call or pays your defense counsel if you have a claim.
When shopping for a professional liability insurer, here are the basic questions to ask:
- Does the company have a stable history of weathering decades of pricing/economic cycles? Is there commitment to the product line even in bad times.
- Is the company’s geographical reach commensurate with its financial size and ability to supervise its distribution partners? Slow and steady growth versus rapid expansion showcase stability as well as protection for yourself, especially if the insurance company grew with the help of a select group of disciplined agents in targeted, lower risk areas.
- Check out the Company’s financial statements and management experience levels. Are there any red flags showing in your research? Any recent turnover in the underwriting executive ranks, CEO or CFO positions?
- What is the Company’s reputation in the community for fairness and loyalty to its policyholders, especially those that have a reported claim with the insurer? What is the company’s reputation for timely payments to their defense counsel? What do the social media sites have to say?
- Look for strong favorable reviews and ratings by the financial rating bureaus like AM Best. Do some research...kick the tires.
5) Understand how your premium is figured
There are six basic factors that determine (drive) your professional liability premium:
- Amount of coverage desired (limit and deductible)
- Number of professionals to be insured (or annual gross revenue with some professionals)
- Number of years of prior acts exposure
- Areas of practice concentrations
- Claims experience
- General risk management systems and procedures
These six components are common rating elements in just about all professional liability insurance products. See some practical tips in the following ebook on how to get the best value for your premium dollar.
6) Avoid the biggest culprit for a Gap in Coverage that there is...procrastination!
Follow these general rules on Timeliness:
- Renew your policy on time so that there is no interruption in your coverage;
- If you think that there is a reasonable chance that someone could allege you did something wrong or failed to do something, then you know about a circumstance that could result in a claim being made against you. You are obligated to report that circumstance to your insurance company during the policy period. If the policy renews, it may be too late to do so and you are in for a claim denial in the future!
- Be proactive and poll the staff and licensed professionals on potential claims so the management body has time to review the matter and report it.
7) Give ‘em the facts ma’am, just the facts…
It’s a common misconception with professional liability insurance buyers that you need to tell the insurance company of any possible work that you may even remotely take on or want to take on. It’s true, underwriters don’t like surprises (and neither does your broker, for that matter), but the area of practice allocations that you list in your application do not determine if you are covered for the professional services you perform (unless you intentionally tried to mislead the Insurer!)
If you want to know if you are covered for a new area of practice, review the policy’s definition of Professional Services and the Exclusions, call your broker if you still have questions. Here is a typical definition of professional services, Professional Services mean those services performed by an Insured in the state or states in which the Insured maintains a license in good standing to perform services for others as a (fill in the blank).
The typical professional liability application will ask you to provide the percentage of the your revenue in the past 12 months derived from a list of acts/services. It wouldn’t make sense to include a case or activity that you haven’t billed or been paid for, and if the work is risky, you’ll be surcharged for it unnecessarily! If you still feel the need to tell all, a better approach would be to include a statement with your area of practice percentages:
If the insurer would typically ask for a supplemental application had such work occurred, complete one. It shows your competency to perform such work and will typically provide a representative case size that won’t panic the underwriter. Chances are you won’t be surcharged for work you didn’t do!
Any coverage descriptions provided in this blog are for illustrative purposes only. Refer to your policy for actual coverage intent and always consult with your insurance agent or broker.