by Curtis M. Pearsall, CPCU, AIAF, CPIA, President – Pearsall Associates, Inc., and Special Consultant to the Utica National Agents E&O Program
As producers look to place coverage for their clients, there is a good chance that professional liability could be one of the exposures needing attention. When most agency sales staff think of professional liability (a/k/a errors and omissions), the following classes of professional business come to mind: travel agents, real estate agents, lawyers, medical professionals, accountants and others. While these the more common, there are over 100 additional professional occupations including appraisers, engineers, pharmacists, court reporters, funeral directors, speech pathologists, consultants, therapists and teachers that have a professional liability exposure
Identify the exposure
How do you know if the account has a professional liability exposure? Although you can ask the prospect, he or she could be unaware of this aspect of the exposure or may believe his or her general liability (GL) policy will afford the necessary coverage.
A great way to start determining if a professional liability exposure exists is through the use of an industry exposure analysis checklist. When placing the general liability exposure, ask your carrier underwriters whether they will include a professional liability exclusion on the GL policy. This will provide some indication that there is a professional liability exposure and that the GL does not intend to cover that exposure.
Complete the necessary apps
Most professional liability carriers will require a completed application to provide a proposal. The carrier will have its own specific application in many cases, so it is best to secure those necessary apps upfront. As with any app, accuracy is extremely critical. A producer should not look to complete these apps based on the belief that he or she knows the “correct answers.” It is highly suggested to meet with the client, ask the questions and document the answers accordingly. The client should be asked to review the app and, if the responses to the questions look correct, the client should then sign the app.
Most professional liability carriers will request the app 30-45 days before the expiration date. There may have been times in the past where a carrier could turn around the app in less time, but don’t count on it … especially in a hard market where the application activity could be on the rise.
Review of the proposal
This is an extremely important part of the process. Professional liability coverage is normally written on a claims-made form. A key aspect of claims-made policies is that it is rare to find two policies that are similar. Plus, the differences can be extremely significant. For these reasons, producers should always secure a complete specimen policy from the market. This specimen policy should be provided to the prospect for review and comments.
Issues that should be reviewed include:
What activities are covered? A key area for a potential significant difference involves the description of covered professional services. This area must be reviewed by the agency and the client when coverage is being placed initially or being moved to a new carrier at renewal time. Is everything that your client does included? Just because the activity was mentioned on the application does not mean coverage for that exposure is being provided.
In addition, every professional liability policy has exclusions, so these should be reviewed by the agency and the client to determine, to what degree, those exclusions are of concern.
Who is covered? This issue, typically addressed in the definition of “who is insured,” is a common area where professional liability policies can vary from one carrier to another. The differences can include positions such as the board, temporary staff, former employees, spousal coverage etc.
Is there “full prior acts” or a “retroactive date?” This issue is huge and has been a major issue with professional liability coverage. For coverage to potentially apply, the date of the “error or omission” must be after any applicable retroactive date as noted on the policy. In other words, there is no coverage for any wrongful act that occurred prior to the retroactive date. For the customer to have coverage for all prior wrongful acts, he or she should look to secure “full prior acts” coverage. If the professional liability contains a “retroactive date,” this should be brought to the customer's attention and the significance explained. If the coverage is moved to another carrier at renewal time, the new policy should have the same retroactive date as the expiring policy. If the carrier is providing a more current retroactive date, this is significant and potentially extremely damaging to your customer. Don't be misled by the premium differences because chances are the premium will be less because, essentially, the coverage is less.
The limits and how they work. Since there is probably no “right” limit for your client, it is best for agencies to provide options for the client to consider. In the world of professional liability, limits are provided on a per-claim and aggregate basis, so options involving both should be presented. To avoid your client exhausting his or her limits because of one claim, it is suggested to provide options where the aggregate limit is a multiple of the per-claim limit.
The deductible. Professional liability policies will typically require the policyholder to pay a deductible in the event of a claim. The deductible can involve defense costs and the judgment, or possibly only require payment of the deductible if the client is determined to be liable. This is an important coverage issue that should be reviewed with the client so he or she understands his or her obligations at claim time.
E&O claims involving professional liability can be huge
The professional liability line of business has generated a significant amount of E&O claims activity. When they happen, they can be extremely large, well into the multi-million dollar arena. Agency staff dealing with this exposure should be well trained on the product and how it works.