Professional Liability Insurance – The Rest of the Story
by Alison A. Cave
Insurance is a fact of life. Health insurance helps you pay the medical expenses incurred during a medical emergency. Motor vehicle insurance helps you get back on the road after a crash. Homeowners insurance gives you the peace of mind your possessions can be replaced in case of a tornado, a burglary or other tragedy.
But are you adequately protecting your career as an attorney? Although attorneys rarely make the media highlights for civil lawsuits, the risk of financial and professional ruin is a reality. The best protection is to purchase professional liability coverage. Lastly, do not forget, you want your clients protected as well.
Don’t panic. As in any purchase of this type, you need to find a company with whom you are comfortable, confident and trust to assist in every stage of a professional liability claim. Here are some key tips for understanding professional liability insurance.
THINK ABOUT HOW MUCH COVERAGE YOU NEED
Professional liability coverage often comes with two liability limits (split limits). The per- claim limit is the maximum coverage you will have for any single claim in the policy period. The aggregate limit is the maximum coverage you have for all claims covered in the policy period. So how much coverage do you need? Unfortunately, there is no magical mathematical formula but here are some factors to consider.
First, consider the monetary value of the cases you handle. Average dollar value can be misleading because there is no guarantee a loss payment will be the average value of the cases you handle as the loss can exceed the average value. However, it is a good starting point, but one in which you should include some cushion due to time factors. In some instances, a claim will not be brought for a considerable time such as in a real estate case where the alleged malpractice is not discovered until the property is sold or the owner dies which can be for some lengthy period of time. Therefore, a loss may have increased due to inflation as well as other factors.
Second, consider defense costs. Litigation is expensive. Some policies can include a claims expense allowance, which is in addition to the liability limits. “Claims expense” means fees charged by any attorney designated by the malpractice carrier to represent you in a claim and all other fees, costs and expenses resulting from the investigation, adjustment, defense, repair and appeal of a claim, if incurred by the malpractice carrier.
Be aware of how the claims expense allowance is handled. If the policy includes a claims expense allowance, once the allowance is exhausted, the expense then is taken from the liability limit. In other words, the policy begins to waste away until the liability limits are exhausted or the matter is resolved within the liability limits. If the policy does not include a claims expense allowance, the expense is taken directly from the policy limits and begins to waste from day one. These are factors to consider when deciding how much coverage you need to purchase.
UNDERSTAND HOW A CLAIMS-MADE POLICY OPERATES
A claims-made policy will provide coverage for alleged actions which occur during the time the policy is in effect as long as the policy is still in effect when the claim is made. The important date in a claims-made policy is the date the claim is made (first reported) not the date the incident occurred. The date the incident occurred might be important for purposes of determining whether this date was excluded by a prior acts exclusions, which will be discussed more fully below. One of the seminal statements on the subject of distinguishing claims-made policies from occurrence policies was enunciated by Sol Kroll:
With the development of a more complex society, it became more reasonable, particularly with respect to the activities of professionals, to insure against the making of claims, rather than the happening of occurrences, and “claims made” insurance developed to meet a need for professionals to insure against the making of a claim as the insured event, rather than having to struggle with traditional concepts and difficulties inherent in determining whether the “event” insured against was the commission of an act, error or omission or the date of discovery thereof or the date of injury caused thereby.
The major distinction between the “occurrence” policy and the “claims made” policy constitutes the difference between the peril insured. In the “occurrence” policy, the peril insured is the “occurrence” itself. Once the “occurrence” takes place, coverage attaches even though the claim may not be made for time thereafter. While in the “claims made” policy, it is the making of the claim, which is the event and peril being insured, and, subject to policy language, regardless of when the occurrence took place.1
Thus, the date of the alleged error or act is only relevant to make sure the alleged error or act is not excluded under a prior acts provision. Prior acts provisions bar coverage for claims arising out of an insured’s wrongful acts prior to a specified date. The date may coincide with the termination of coverage under a previous policy. The date may also coincide with a change in employment.
The pricing for a claims-made policy is stepped, meaning the annual premium is deeply discounted at first and will go up each year for several years to a point where the policy reaches maturity and rates level off. The “step-rating” methodology does provide a benefit to those entering practice, as it allows them to do so much less expensively. Continuity of coverage is critical under the claims-made form. It is recommended an insured purchase extended reporting endorsement also known as “tail coverage” if the insured decides not to renew coverage. Tail coverage will continue to cover claims for actions occurring during the policy period.
UNDERSTANDING THE ELEMENTS OF PROFESSIONAL LIABILITY COVERAGE
Professional liability coverage can be broken down into the following elements:
- The application
- The declaration page
- The insurance policy, which will include coverage agreements, exclusions, defense and settlement provisions, limits of liability and conditions
Each element is discussed in more detail below.
In the application, you supply material about the law firm, yourself and any attorneys practicing with the firm, and the law firm’s practice. Be truthful. If you suppress relevant information, the insurance company may have grounds for cancelling or voiding your policy.
If you have a “high-risk” practice or claims and fear these may preclude coverage, do not succumb to the urge to sidestep furnishing the insurance company complete information. Rather, show the insurance company what steps you have taken to minimize perils in your practice and explain why the insurance company should not be fearful of insuring you because of the procedures you and your firm have taken to mitigate those exposures.
Disclose all past claims and explain any extenuating circumstances, mitigating facts and corrections made to the firm’s practice. The more information you can provide will establish you and your firm are aware of the issues. The description of the steps you and your firm have taken to solve these earlier claims will help the insurance company see the risk has diminished because of your curative actions. Remember to complete all questions and put your best foot forward.
The Declaration Page
The declaration page summarizes the provisions of coverage, specifies the beginning and end of the policy period, states the limits of liability on a per claim basis and aggregate annual basis, specifies the deductible per claim, and the impact of defense costs to the limit. The “Named Insured,” which is acknowledged on the declaration page, will be further defined in the insurance policy itself and may be defined further by an endorsement.
The Insurance Policy
The insurance policy usually will encompass the following provisions:
Coverage Section: details for what services, events or actions coverage applies. Services, activities or actions, which may be covered, include:
- Professional services as an attorney; and
- An attorney who has been court appointed to act as trustee or executor.
This section will include the definition of named insured, which is usually defined as the partnership, professional corporation or individual names on the declaration page. Other lawyers covered by the policy are usually listed on an endorsement page or as additional insureds.
In addition, the policy may specify the following coverage:
- “Prior acts” which is coverage for acts that occurred prior to the policy period, the date on which the prior acts coverage is effective will be stated either in an endorsement or the declaration sheet.
- Optional extended reporting period, which is additional coverage for claims reported after the expiration of the policy for errors committed within the policy period. Usually, this coverage must be purchased within 30 days of the policy’s expiration for a specific time period and for an additional premium.
Exclusions Section: states specific activities, which are not covered.
The coverage section provides coverage and the exclusions section takes coverage away. If an activity is in the exclusions section of the policy, you do not have coverage for that activity. It is up to the insurance company and the terms of the policy if a defense (with no obligation to pay a judgment) will be provided.
Each insurance company’s policy is different, so it is extremely important to examine exclusions carefully. Listed below are exclusions sometimes found in professional liability insurance policies:
- Dishonest acts
- Fraudulent acts
- Criminal acts
- Malicious actions
However, an innocent partner is usually af-forded coverage for the four acts listed above.
- Claims made by or against a business enterprise owned or controlled by an insured (the business is making the claim)
- Claims arising out of or in connection with a business enterprise owned or controlled by an insured (a third party is making the claim) in which a conflict of interest is alleged, or in fact present
- An attorney’s activities as an officer, director, etc., of a business not owned or controlled by the insured
- Activities as a public official
- Any claim arising out of bodily injury, sickness, disease, or death of a person, or injury to or destruction of any property
- Loss sustained as a beneficiary or distributee of a trust or estate
- Claims involving division of fees or fee apportionment between an insured and any other insured, lawyer or lawyers
- Claims involving discrimination and/or sexual harassment
- Prior acts where the insured had knowledge of or should have foreseen the claim
- Claims involving punitive damages, fines, statutory penalties and sanctions
- Claims for the return of fees
Defense and Settlement Section: explains the law firm and the insurance company’s rights regarding settlement, such as whether the law firm’s consent is required to settle.
- The policy will usually provide who has the right to select defense counsel in the event of the claim.
- The policy will usually provide whether the insured’s consent is required to settle a claim. If the insured’s consent is required, policies often place a limit on what the insurance company will pay if the insured refuses to settle
Limits of Liability Section: states what and how the policy will pay.
- The specific limit of liability of each claim
- The aggregate liability on a firm basis – in other words, the total limit of liability for all claims in that policy year
- The per claim deductible or the aggregate deductible. In other words, does the deductible apply to each of every claim separately or is there a total deductible to be paid in a single year.
- Whether claim expenses are included in the limits of liability or does the policy have a “claim expense allowance.” If the claim expense is included in the limits of liability, the amount of coverage available to pay the loss shrinks daily from the cost of defending the claim. If there is a claim expense allowance, the amount of the allowance is available to defend the claim in addition to limits of liability. However, once the claim expense allowance is exhausted, then the limits of liability will be used to pay the defense as well as the loss.
- Whether two or more claims arising out of a single act or series of acts are considered a single claim. If they are considered a single claim, the policy may provide the policy year in which the first act is reported is considered the claim reporting date. Thus, the limits of liability and terms of coverage will be the same for the additional claims arising out of the same acts.
Conditions Section: stipulates certain conditions to coverage.
- A requirement the insured provide timely notice to the insurance company of all claims and potential claims.
- A requirement the insured assist and cooperate with the insurance company, which may include attendance at hearings and trials, attendance at depositions and securing evidence.
- Subrogation rights.
- Provision of coverage in excess of other available insurance.
- Provision regarding the arbitration of claims.
- At least a 45-day notice of cancellation of the policy by the insurance company.
Endorsements alter coverage in some way on a firm-by-firm basis. Insurance companies use endorsements to change coverage on a selected basis, without altering the policy for everyone. Endorsements can either add coverage by including work as a title agent or adding any attorney to the policy. Endorsements can change coverage or limit coverage by excluding a specific lawyer from the firm’s coverage or to expressly exclude a business entity.
Finally, do not forget customer service. When you are considering your professional liability carrier, look at how easy or difficult it is to pay premiums, renew policies and contact the company with questions. Is the company local or have an office located in your area? Is the company committed to writing this line of coverage on a long-term basis? There are times when it may be important for you to have the ability to meet with the claims personnel or underwriting personnel face to face. More importantly, when you have a claim, you want to feel comfortable talking about the details of the claim, which may involve some delicate or even embarrassing situations. Be sure you explore those customer service issues before you purchase your professional liability coverage and make sure the professional liability carrier is the right fit for you and your law firm.
1. Anderson v. Ichinose, 760 So.2d 302, 305 (La. 1999) quoting Sol Kroll, The Professional Liability Policy “Claims Made,” 13 Forum 842, 843 (1978).
About The Author
Alison Cave is Vice President of Claims for Oklahoma Attorneys Mutual Insurance Company. Ms. Cave began her legal career as a law clerk with Justice Yvonne Kauger of the Oklahoma Supreme Court. She was a law clerk for the Court of Civil Appeals. She has taught legal research and writing/appellate advocacy at Oklahoma City University. She was an associate with Steidley & Neal. She was an associate with Driskill & Jones.
Originally published in the Oklahoma Bar Journal, October 6, 2012 - Volume 83, No. 26