Professional Liability Insurance primer

All professional face the possibility of lawsuits if the advice or services they provide to clients fail to meet expectations and results in the client, or a third party, suffering a financial loss.

Legal liability for professional advice or services has been well established since the 1930’s 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 headcount. Premiums are then modified by reference to the individual risk characteristics described in the application, the amount of coverage (limit) 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 starts with a preamble describing in specific terms what is covered and by whom (the insurer). Most policies contain a statement that coverage is written on a claims-made basis. This means for coverage to be given, a claim must be made during the policy term. This contrast with occurrence policy used for general liability insurance or certain type of medical malpractice.

The next section is often the definitions, which contains an itemized list of terms used in the policy and what the insurer considers these terms to mean. Often these terms are highlighted by italics, bold font or quotation marked throughout the policy. Careful evaluation of these terms is extremely important and they 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 this. 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 costs. Some insurers may deal with limit and deductible modification in 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, type 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 professional 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 or pollution risks) Many insurers include and 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 unsurer 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.