Professional Liability Insurance

At a Glance
Professionals are expected to have extensive technical knowledge or training in their particular area of expertise. They are also expected to perform the services for which they were hired, according to the standards of conduct in their profession.

If they fail to use the degree of skill expected of them, they can be held responsible in a court of law for any harm they cause to another person or business. When liability is limited to acts of negligence, professional liability insurance may be called "errors and omissions" liability.

Professional liability insurance (also known as malpractice or errors & omissions) pays your defense costs if you should find yourself being sued by a client or if you have to answer to a certifying or oversight board or peer-review committee.

In many cases, the insurer will provide expert attorneys to argue on your behalf. If a judgment goes against you, the insurer may pay some or all of your obligations and court costs.

Do I Need It?
Most professional organizations - not just those in the legal or medical fraternities - recommend that their members carry professional liability insurance. This includes accountants, interior designers, engineers and university professors. For example, consider the following:

• “With the high cost and serious consequences of a professional liability lawsuit, comprehensive protection is especially important for CPA firms today.”
  American Institute of Certified Public Accountants



• “Each member needs protection against the expense of a lawsuit.”
  American Society of Interior Designers



• “Professional liability insurance counters risks you face and protects you for negligent acts, errors and omissions.”
  Institute of Electrical and Electronic Engineers



• "No matter how well you perform your professional duties, you can still be sued. … Professional liability insurance helps counter the risks you face in doing your job. "
  American Association of University Professors

Professional liability insurance is a specialty coverage. Professional liability coverage is not provided under homeowners endorsements, in-home business policies or Business Owners Policy (BOP).

Consult with your Marsh SBI insurance representative for an evaluation of your professional liability insurance needs. Your representative will assess your risk and, if professional liability coverage is indicated, provide a custom coverage proposal.

More Information
While you may believe that your existing professional liability coverage is suitable and affordable, the best time to rethink your options is when you feel the most comfortable. There are three main reasons why you may want to reconsider your protection:

1. Changing times — If your professional liability insurance dates from just after 2001, when insurance costs started to skyrocket, you may find that costs have leveled out, and the same coverage actually may cost less now. Besides, you re-evaluate most other long-term expenses periodically; shouldn’t your insurance be one of those?
   
   Studies show that professionals who shop their insurance every five years or so generally pay between 10 percent to 20 percent less than those who do not. Your insurance representative can help you determine whether you are paying too much for your current insurance.



2. Changing Conditions — No matter whether your professional business is in its learning-to-walk stage or has matured into a solid revenue producer, your insurance needs change constantly—sometimes more frequently than year to year! Why not take this opportunity to ask yourself the following questions:



• Have you made or are you considering making any changes to staff?



• Are you or your firm branching into new areas or concerns?



• Have you acquired or are you considering acquiring any clients who appear frequently in the public eye?



• Have you begun or are you considering taking on clients who are headquartered out of your state?


3. Program Business — When various types of professionals share certain perils, an insurer can create a pool of risk, which can result in lower premium costs. A customized insurance package called program business can identify perils common to your profession and be offered to your colleagues. This can result in a lower premium rate than you might find if you pursued this coverage on your own.
   
   Because such program business commonly involves products and services from more than one insurer, a program administrator is commonly called upon to manage it. Generally, this licensed entity performs the administrative functions of an insurance provider, including insurance quotes, taking care of premium billing and collection, and advocating on behalf of the insured. Experienced program administrators may be large companies that have worked with many insurance providers over the years.

Planning
Before considering any professional liability plan, you need to assess how much cash you would need should you become involved in a liability issue. Factors you should consider include:

• Attorneys’ fees



• Investigations on your behalf



• Court costs and damages from a negative judgment



• Civil and/or association penalties



• Cash that would offset loss of revenue should you have to suspend your practice for a considerable length of time

In addition, you should consider the cost if you were to be involved with multiple losses within a single year. The severity of a loss also is a strong consideration. Your firm may be accepting much more business than before, or business that incurs the risk of severe loss.

As with homeowner’s or auto insurance, you need to specify a deductible, an amount you would pay out of your pocket before your insurance coverage kicks in. As with other types of insurance, the higher the deductible, the lower your premium rate. You and your insurance representative can estimate your probability of having a claim filed against you within five years and decide if a higher deductible makes sense for you or your firm.

Limits of Liability
Limits of Liability are generally represented on two levels, e.g., $100,000 / $300,000). The first number refers to the "per occurrence" limit, and the second number refers to the "aggregate" limit. This means the policy will pay up to the first number per claim, and up to the second number during the course of the policy year.

When selecting a specific coverage, it is important to take an objective look at the potential damage to your practice or firm from the biggest case. Ask yourself how much it would cost to cover a claim, and assess this realistically. There should be enough coverage to protect yourself against the worst-case scenario.

One common benchmark is to select an each-claim limit that would cover all or most of the firm's liability for a claim (plus the cost of defense) arising from a "typical" engagement, assuming the firm was found to be 100% responsible.

Deductible
Your deductible may apply to each and every claim or may be aggregated on an annual basis. The deductible may apply both to loss and defense costs, and defense costs may be deducted from the limit of liability, or they may be paid in addition to the limit.

Your deductible choice depends on how large a check you can write without seriously disrupting your finances, and how much you can save by choosing a larger deductible. Increasing your deductible will lower your premium, but you should be realistic in weighing the value of minor premium savings compared to the additional risk you are assuming, since you will have to pay your deductible before the company begins to pay for costs.

A good way to evaluate this tradeoff is to request several quotations that "bracket" the deductible you feel most comfortable with. Remember, also, to consider whether the deductible applies separately to each claim, or applies on an annual aggregate basis regardless of the number of claims in a policy year.

Definitions
You should understand these definitions and be prepared to discuss them with your insurance representative.

• Claims Expenses Outside The Limits—You may decide that you need more coverage than a standard policy may supply. Some insurance providers may add an option called Claims Expenses Outside the Limits, similar to a homeowner policy’s “umbrella coverage.” Claims Expenses Outside the Limits are not available everywhere, and generally, benefits are capped at $1,000.000.00.



• Excess Insurance Insurance—Similar to Claims Expenses Outside the Limits, this coverage pays once the primary insurance is exhausted. It is very important that the primary and excess policies have the same effective and expiration dates.



• Exclusions—Defines what is not insured by this policy. You need to read this section carefully, as certain policies exclude a common area of your practice.



• Hammer Clause—This clause states that if an insured does not accept the insurer’s recommendation, then the insured is liable for any additional costs. It is contained in many insurance agreements.



• Innocent Insured—Protects your partners or other principles from the deliberate acts of another employee or partner if the others had no knowledge of the actions.



• Limit of liability-aggregate—The maximum indemnity and claims expenses amount the insurer will pay for all claims reported during the policy period.



• Limit of liability-primary— This is one of the most important definitions in any policy. It defines who is an “insured” and who is considered insured. It also specifies the maximum indemnity and claim expenses the insurer will pay for any one claim or incidents that are considered one claim.



• Policy period—Most professional liability policies are annual, but some are multiyear.



• Prior Acts—Acts that occurred before the current policy period may not be covered unless the current policy has a Prior Acts Date. To prevent gaps in coverage, it is very important to maintain your Prior Acts Date, once established. Variations of Prior Acts include:



• Firm Prior Acts: Everyone in the firm is covered by the same prior acts date.



• Individual Prior Acts: Each individual in the firm has a different prior acts date.



• Career Coverage: Each individual has coverage for all covered professional acts, regardless of the firm prior acts date.
• Step Rating—Most policies are step-rated, meaning the premiums increase during the first 3 to 10 years because the policy is covering more and more Prior Acts. Once the policy becomes “fully rated,” the only changes in premium should occur because of claims history of the individual or the insurance carrier; changes in the areas of practice of the professional; and/or changes in the general insurance environment.



• Warrants/Representations— Many insurers attach a copy of the insured’s application to the policy. This makes it part of the policy and “Warrants” the statements made as being absolutely true. “Representations” are those statements made by an insured that are true to the best of their knowledge. The difference can be important if an insured has not done due diligence with all parties in a practice to make sure that all information is properly reported.

What’s The Next Step?
Not all insurance companies offer professional liability insurance. However, if you are a member of a professional association, you may find that your group has partnered with an insurance broker to offer professional liability insurance. Frequently, this coverage is program business, as described earlier, which insures you against perils that are common to you and your colleagues.