Insurance Primer

Written by Instant E&O

All businesses face the possibility of lawsuits (legal liability) if the advice or services they provide to clients fail to meet expectations and result in the client, or a third party, suffering a financial loss. Lawsuits can be brought against you by clients, vendors, lenders and clients’ customers. We work in a litigious environments and having adequate Errors and Omissions insurance protection is a key component of business success.

Errors and Omissions insurance is often a requirement of a job or contract and a client will expect you to provide a policy or certificate as evidence of coverage. A policy is usually written for at least one year and on a claims made basis. This means that for coverage to apply, the claim must be made during the term of the policy. 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 head count. Premiums are then modified to by reference to the individual risk characteristics described in the application, the amount of coverage (Limit of Liability), 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 begins a declarations page. This itemizes in a relatively easy to read format: the name and address of the insurer 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. The declaration page may also include a retroactive date. Any work performed before this date will not be covered by the insurer.

The first section of the policy itself begins starts with a preamble describing, in specific terms, what is covered and who it is covered by (the insurer). Most policies contain a statement that coverage is written on a “claims-made” basis, which means that coverage only applies to claims made during the policy term. This contrasts with the “occurrence” policies used for general liability insurance and certain types of medical malpractice insurance.

The next section, definitions, contains an itemized list of terms used in the policy and what the insurer considers the terms to mean. Often these terms are highlighted in italics, bold font, or quotation marks throughout the policy. Careful evaluation of these terms is extremely important because the terms 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 the coverage. 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. Some insurers may deal with limit and deductible modification on 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, types 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 profession 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 and pollution risks). Many insurers include an officer’s signature at the end of this section.

A policy may also contain endorsements which change the terms of coverage. This override the policy and should be reviewed carefully for any additional limitations or exclusions.

Whatever the format used, 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 in professional liability insurance usually involves the insurer hiring an 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 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.