In the last post of this series, we talked about the different ways in which professional liability insurance can be bought and about who most benefits from designing their own insurance policy.
In this post, we talk about how to decide what a designed professional liability insurance policy is going to be written to achieve.
Establishing objectives for the coverage requires an understanding of the nature of the firm the coverage is being designed for, the resulting nature of the risks the firm therefore has and – often overlooked but most important – the nature of the relationship the firm has, or wants (or needs) to have, with those risks.
Using this process allows us to capture the business owner’s perspective of their business and then to translate that into a risk manager’s perspective and then into the perspective of an insurer. This is necessary because the insurance industry manages volatility by creating portfolios of risk types. This means an insurer’s first step is to understand which risk they are being asked to look at, then to consider the customer. We have to think like our customers in terms of what their business looks like first, and only after we have understood them can we segment them into their risks and then the possible insurance for those risks.
No – I don’t understand why insurance still categorizes by risk, not customer type either… I am sure that, when insurance was an entirely manual process, it was easier to create a few risk based (professional liability, general liability, property, etc) categories for every policy to be part of, rather than try to understand the differences between and then categorize every policy by the far larger number of customer types than there were insurable risks. The problem with having retained this risk based approach into the digital era is that we now have to find workarounds for the fact that the insurance process is structured for the provider’s convenience, not the user’s – and that is never a good place to start for a good user experience… This post outlines our workaround, which we call our risk information model.
Each of these stages is important and we don’t think any can be overlooked.
Understanding the firm
To understand the nature of the firm, even if the firm operates in an apparently well-known and well-understood space in their market, it is important in designing coverage to dig into the specific ways in which their business model operates.
For example, two 20-lawyer law firms may look, according to their “off the shelf” proposal forms, to be identical if both are active in similar areas of practice, in the same city, with similar revenues. But real differences may lie, for example, in how they reach their customers, the types of customer they have, and the relationship they aim to have with those customers – among many other things.
These differences really matter because, for example, one firm may have a customer base made up of large corporate clients, where the insured buyer has less bargaining power in terms of the contractual terms of their engagements with clients than a firm dealing with individuals. Though the almost universal contractual exclusion in professional liability policies is designed to protect insurers from contractual provisions that extend liability beyond common law (and so protect them from power imbalances), the existence of larger and potentially more aggressive and deeper-pocketed claimants will need to be considered when drafting, for example, notification and incident and claim handling provisions in a designed professional liability policy.
Understanding any plans to alter the nature of the firm should also be explored. For example, an accountant that has only previously offered a face to face tax service to known customers will be changing the nature of the firm if they decide to offer an online tax filing service.
Understanding the firm’s risk(s)
Understanding a buyer’s risk – focusing just on professional liability risk here – is not just, in the case of the law firms above, a question of understanding how different areas of practice have different frequency and severity characteristics. For example, different areas of practice also have different timelines. Some exposures last a long time, like estate trust and probate work, where problems can take 10 or more years to surface. Problems in other areas of practice, like employment law, are generally discovered much sooner.
Areas of practice – to take just that as an example but there are other issues that will also need to be considered – will inform the retention required, the ideal limit and the depth of retroactive coverage required of the policy.
Understanding the relationship the firm has with its risks
Having understood the firm and its risks, understanding the relationship the firm has with its risks informs what the policy is designed to achieve. This third stage is essential if the most nuanced components of the resulting designed policy are to deliver what the buyer needs.
For example, different issues may be more or less important; for some buyers, the speed of response to a risk incident is critical, to others, developing knowledge from incidents or claims is the most important consideration, and for yet others, keeping down the costs of managing risk or handling incidents and claims is the priority. The policy drafting process is almost completely informed by what is on the list of priorities, how long the list is and on the order of the priorities.
Further, describing how you respond to different elements of your risk, based on their characteristics can be helpful. For example, the causes of most professional liability claims are similar across professions. The causes include engagement (retainer or non-retainer) failures, communication failures, oversight deficiencies and the absence of a trail proving what you said or did (or not) in the often dim and distant past. Failure to apply the knowledge expected of a relevant professional is also, naturally, another cause but it is less common than people tend to imagine at, depending on the profession, 25% or so of all claims. The issue isn’t whether you have controls in place to identify, prevent or mitigate these causes but the choices you have made of the potential options available. Most buyers with new, complex, unusual, hard to manage or distressed risks will likely already have strong controls in place for the causes that matter most to them but discussing them candidly in the submission is an effective way of demonstrating a positive relationship between a buyer and their risk.
It is this third stage of understanding, and being able to demonstrate, the relationship the buyer has with their risks that most helps policy designers to extend coverage far beyond what a typical “spreadsheeted” policy can offer.
For example, we recently worked with an information company that has a statutory obligation to take responsibility for errors and omissions that are totally out of their control. Such obligations are not only potentially far greater than their negligence exposure but they are traditionally not covered by any insurance policy. For 10 years, this firm had been told by the biggest brokers and insurers in their market that these exposures were uninsurable. But, because we were able to show how the additional liability potentially arose, how the risk was managed and how successfully the buyer had consistently managed the risk, we were able to design and place a policy that, in addition to addressing the firm’s traditional professional liability exposure, also covered their statutory obligations.
If we had not gone through all 3 stages of this initial design process, the coverage this firm needed could not have been obtained.
In the next post, we will talk about some of the main choices available in designing a professional liability insurance policy.
Note: This series of posts concerns the design process for one company’s professional liability policy. We use professional liability to demonstrate the process because it is the most common policy we design. We use the same process for every policy we design.
Disclosure: We specialize in designing insurance policies. In addition to professional liability, we also design – for example – sexual abuse liability, cyber, employment practices liability, financial institutions and crime coverages.