In the last post of this series, we talked about how to decide what a designed professional liability policy is going to be written to achieve.
In this post, we will talk about some of the main choices available in designing a professional liability insurance policy. There are many detail choices we can’t talk about however, for space reasons. For the same reasons, we also won’t discuss how to integrate a professional liability policy with the other policies most professional services firms buy; or to put it more accurately for most firms, we won’t discuss how those other policies really must be integrated with professional liability, which is almost always the most important policy a professional services firm buys.
All professional liability policies, whether they are “off the shelf”, “spreadsheeted” or “designed”, are intended to cover claims made against a professional firm for losses suffered by a third party (usually, if not always, a customer) because of the failure on the part of the firm to meet the expected professional standards of the firm’s services.
Based on this common intent, almost all professional liability policies also operate along the following cause and effect chain, where they may either indemnify (reimburse) or “pay on behalf of” the insured:
Loss: … the effect – for example, damages, judgements, settlements and defense costs; can also include costs to correct an error to prevent a claim;
…resulting from a claim: …the policy trigger – for example, a written demand for monetary relief;
…alleging a wrongful act: …the cause – for example, an actual or alleged act, error, omission, misstatement, misleading statement, neglect, or breach of duty;
…in connection with the rendering or failure to render professional services – where the covered activity(ies) that the cause can arise from may be both described and/or qualified.
As noted above, each of these links in the chain can be designed to meet the specific needs of the buyer, though some of the design options are less common than others. Loss can be tailored to limit coverage to defense costs only, though this is rare; insurers don’t like offering this because there is often too little incentive for an insured to settle a claim while defense costs are still insured.
Claim can be defined as a written demand for… Or it can be broadened to include knowledge that a written demand is likely to be made or even that the buyer has become aware of something that, if not dealt with it, could lead to a claim. In other words, the coverage can be designed to help preempt a claim.
Who might make a claim against you can also be tailored; the most common divergence is whether claims from regulatory bodies are included or not.
Wrongful act can be narrowly defined as nothing more than the single tort of negligence or broadly defined as almost any civil liability and even extended to include defense against criminal allegations.
Professional services can be defined to include everything a business does, so all activities potentially giving rise to a claim are covered. Or the definition can be limited just to the activity the buyer wants (or the insurer is prepared) to cover.
But, although designing a policy from scratch allows for any number of what are normally extensions to a standard policy to be added to the designed policy (what the policy covers), it is the freedom to design how the policy provides its protection that produces the greatest benefits from the design approach. For example, most web articles that discuss what to look for in a professional liability policy ask questions like whether the policy is on a claims made basis (almost every policy is), whether defence costs are outside the limit, what provisions exist for retiring members of a firm or how far the territorial scope of the policy extends. And, as important as these issues can be to many buyers, issues around what needs to be notified, to whom and when and what happens next are usually more fundamental to designing coverage that plays nicely with the relationship the buyer has with its risks.
And, in addition to what and how choices, there are also who, when and where choices. What follows is only an outline of some of these choices, and the descriptions are short because we are only looking here to show the kinds of choices that might be considered by a design buyer during the design process, not to delve into details that will inevitably be specific to each buyer.
Who choices
The two main who choices deal to whose acts are covered by the policy and who is protected by the policy.
The choices around whose acts are covered by the policy will depend on the nature of the firm discussed in Part 2 of this series. For example, some firms operate almost in isolation from any other firm other than their customers. Other firms extensively use independent contractors while yet others are members of networks, where services are delivered by coordinating the acts of a number of different firms. The extent of the contractual obligations assumed by such a network firm will dictate whether, for example, they need to be covered just for their own acts, or whether they also need coverage for the acts of the firms with whom they are networked.
The choices around who is covered by the policy are again informed by the earlier stages of the design process. For example, in the mirror of the point above, other firms that a networked insured firm works with may require that they are covered for the acts of the insured firm – because the other firm may not want to use their professional liability policy to cover the insured firm’s acts. Bargaining power can be an issue here. A key issue to be aware of when determining who is to be insured is that most professional liability insurers will expect to include an insured vs insured exclusion in their policies, to eliminate purely internal errors from coverage. Not addressing this exclusion, when adding a customer as an insured under the policy, can mean that the very protection being sought by adding the customer is negated by the exclusion.
What choices
The main what choices revolve around what activities and what liabilities are covered by the policy. Most “off the shelf” policies, and even some “spreadsheeted” policies, address only the narrowly defined professional services of the type of firm being insured (for example, an accountant may only be covered for generic accounting services and so any legal services they may also offer won’t be covered).
Bearing in mind that no policy will insure risks that have not been fully disclosed to the insurer in the application form or submission, and that the policy language needs to mirror the description in the disclosure for the scope of coverage to be fully effective, it is essential that, as part of the earlier stages of this design process (outlined in Part 2 of this series), all a firm’s existing and potential future activities are included in both descriptions as far as possible.
In terms of liabilities, most “off the shelf” policies commonly only address the single tort of negligence. The main choice here therefore relates to whether the coverage is limited to negligence only or whether other (or most other) forms of civil liability arising out of the firm’s professional activities should also be covered. A negligence only policy will not cover, for example, defamation, breach of contract, breach of warranty, or an intellectual property violation. While the default position is usually that full civil liability coverage be obtained, this default can shift depending on the extent of the exposure already being borne by the policy and the impact that adding to this can have on the core objectives of the coverage.
A more recent development to professional liability policies is the inclusion of first party coverage. First party risks are risks that the insured firm bears, as opposed to the risk that a third party might make a claim against the insured. First party coverages include incident investigation and response expenses, loss mitigation expenses, or crisis management costs. These perils can either be added as additional insuring clauses or the definition of loss can be tailored to include these. Whether these are beneficial or even necessary additions to the coverage will depend on how these issues are addressed by the buyer – identified when investigating the relationship the firm has with its risks.
When choices
The three main when choices relate to when activities giving rise to a third-party cause of action need to occur to be covered, when a claim against the insured needs to be notified to the insurer and how long after the policy period a claim can still be made.
The tightest form of coverage, which only exists in the tightest “off the shelf” policies, limits coverage such that the acts giving rise to the claim must occur during the policy period and the claim arising from those acts must also be made during the policy period. Since few mistakes are identified as such until sometime (sometimes a very long time) after the mistake is made, this kind of coverage can be functionally useless, unless the objective of the coverage is simply to evidence insurance – any insurance – and keep cost to a minimum.
More commonly, a policy will have a retroactive date, which is the date after which acts giving rise to a cause of action must occur for coverage to apply. Though this date can also be the inception date of the policy – and commonly is set as such on a new “off the shelf” policy – it is ideally set in a designed policy as the date the company came into existence. This then means that any past acts – that could give rise to a claim during the policy period – are covered.
The biggest when choice is when a matter should be notified to an insurer for coverage to apply. The issues here relate to knowledge and when knowledge exists. For example, does the policy assume knowledge when a call is received from a disgruntled client, or when a situation that, if un-addressed, could lead to liability in the future is discovered or is it when a law suit is received? The policy construction issue here is that professional liability policies are claims made policies; they are triggered by claims that are made against the insured during the policy period. The relevant issue therefore is what is a claim? A ‘claim’ can be defined in a number of ways, including any of the above and which option is chosen will, again, depend on the relationship the buyer has with their risk. Buyers that are proactive managers of customer complaints may prefer to notify every disgruntled customer phone call. Others, for whom disgruntled customers may be an occupational hazard, may prefer to wait until a formal claim is submitted by the customer before notifying their insurer.
The real challenge here is when a potential problem is identified in one policy period but a formal claim isn’t made until one or two years later. An added complication is that insurers can change from one year to another. One common way to deal with this situation is to include a continuity date in the policy language. A continuity date is the date after which the failure to disclose or notify newly developed knowledge of a potential situation that later leads to a claim is not held against the insured. It is called a continuity date because it is commonly set as the date from which the present insurer has continuously insured the buyer but this date can extended – by design – over the tenure of multiple insurers.
One other when issue deals with how long after the policy period a claim can still be made and be covered. While all policies respond to claims made during the policy period, some extend the period when claims can be made after the policy period – for example in the case of an accidentally late notice or when a policy is not renewed. These extended reporting periods, which also often come at a cost, apply to claims that should have been notified during the policy or could have been notified during the policy period if they had then been known about. These kinds of provisions can also be built into the policy to allow, for example, a partner in a firm to retire but retain ongoing coverage for work undertaken before retirement.
Where choices
The two key where choices are where covered activities need to occur (the territorial scope of the policy) and where a claim needs to be made (the jurisdictional scope of the coverage). A Canadian firm, operating exclusively in Canada for Canadian clients is unlikely to need more than Canadian territorial or jurisdictional scope. A US company operating worldwide for customers anywhere in the world will likely need worldwide territorial and jurisdictional scope. Once again, these issues are identified in the earlier stages of the design process, when investigating the kinds of customer a design buyer has.
How choices
The key how choice deals with how the policy will react when a claim (however defined) is notified to the insurer and then, how the insurer and insured will work together to deal with the claim. At the risk of repetition, this is one of the key issues that will be uncovered in the earlier stages of the design process.
Some firms – and certainly all firms with “off the shelf” policies – will effectively be outsourcing the handling of all claims to their insurer. For a small firm with little or no experience of handling a claim against them, this is a reasonable option. Preferable even, because the bargaining power of their insurer will always be greater than their own. On the other hand, the existence of insurance can also attract claims, though this concern is rarely sufficient to make not buying professional liability insurance preferable to buying it.
The problem with outsourcing claims for any firm that is in the least concerned with how their claims are dealt with is that outsourcing can involve the effective delegation of all decision-making around the claim to the insurer or their appointed representative – usually a law firm appointed by them to defend the buyer or, sometimes, a law firm appointed by the insurer to act on the insurer’s behalf. This approach is rarely acceptable to a sophisticated professional liability buyer.
At the other end of the spectrum, insurers of designed policies are often willing to leave claims handling almost entirely in the hands of the insured, subject to provisos relating to keeping them informed on a regular basis and their retaining the right to oversee and/or audit how claims are being handled. The scope of these kinds of provision can vary quite a bit, depending on the insureds retention under the policy and their experience dealing with claims. Our view is simply that claims are too important to be left with an insurer but that it is also unreasonable to expect an insurer to offer a blank check as far as claims are concerned. We always therefore advocate for a collaborative process, however the details are described.
The above is a far from complete outline of the choices that a policy designer needs to think about. For example, we haven’t even begun to discuss how much of their risk a buyer should retain nor how much insurance to buy. And as far as ‘the small print’ is concerned, that is a whole other book on its own… The key to remember however is that, by designing a policy from scratch, nothing – in terms of the provisions of the policy – need be “off the table”. At the same time, the policy can be designed to meet the buyer’s real needs and doesn’t need to include anything for which they buyer may be paying but which they don’t need.In the next post, we talk about how to take a risk to market, to obtain the designed coverage.
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.