Mind the Gap
Be sure your clients have this vital protection
Our previous column ventured into the world of commercial lines insurance and explored a few common coverage gaps that Scott Addis demonstrated in one of his advanced sales workshops. This month, we will dive a tad deeper into commercial lines and will review the basics of professional liability insurance, a coverage you will see more often as your book of commercial lines insurance grows.
Before we get too deep into professional liability, let’s take a step back and review some of the different terms that are often used interchangeably for this coverage.
For starters, you might wonder what the difference is between malpractice insurance, errors and omissions insurance, and professional liability insurance. In fact there isn’t much of a difference. You will find that insurers use these terms interchangeably for the same kind of coverage.
Traditionally, malpractice insurance is for physicians and other medical professionals, whereas professional liability is for professionals, such as real estate brokers and investment advisors. Errors and omissions coverage traditionally has been written for professionals and quasi-professionals such as contractors, consultants, and insurance agents.
It’s critical that you match your client’s exposures with a policy that appropriately addresses those exposures.
No matter what you call it, this kind of coverage protects against claims brought by third parties that allege professional negligence or some sort of error in the administration of professional duties or professional oversight. Where things start to get hairy is when you explore what is specifically covered as a “wrongful act,” “claim,” or “professional service.”
Suppose you write a new BOP for a local management consultant and you include an umbrella with the package. Unless you properly explain what the businessowners liability and umbrella both cover, your new client might think he is covered for professional services.
As you spend more time in the insurance business, you will learn that this is a common misconception. Clients think that umbrellas cover everything because that’s what the name of the coverage implies. Obviously that isn’t true.
Nevertheless, once you explain to your client that professional services aren’t covered, the next step is to suggest that you offer them a professional liability quote. Seems simple enough, right?
You might assume that a miscellaneous professional liability policy is pretty straightforward. In many cases this is true. It’s critical, however, that you match your client’s exposures with a policy that appropriately addresses those exposures.
The last thing you want to do is suggest a new policy for an account and then find out at the time of a loss that the policy doesn’t cover what you intended it to cover. Although many professional liability classifications are straightforward, occasionally you will run into murky situations that might not fit into a cookie-cutter professional liability program.
Add the potential for bodily injury or property damage (which many professional liability policies exclude), and you have a potential recipe for disaster.
Steps to ensure protection
There is no need to hit the panic button yet! Following a few simple steps will ensure that the program you propose to your client or prospect is appropriate.
First, make sure you know exactly what your client is doing. This is critical because professional liability policies use a definition of “professional services” at the time of a loss. The claim could be denied if the loss didn’t originate from a service that is included in this definition.
Cody Wiseman, a senior broker and sales leader at Hull & Company, Inc., notes that many carriers are moving toward broader professional services definitions for their miscellaneous professional offerings. An example is a definition that includes “services provided by the insured to third parties for
a fee.” This kind of definition is often subject to a list of specified professional services that are not covered (e.g., accounting services, architect services, banking services, etc.).
It must be noted, however, that many forms do use specific professional services definitions, so it is important to review the definition used and work with your client and the carrier to ensure that it accurately describes the extent of the client’s professional services.
Wiseman also stresses the importance of working with carriers and underwriters that have knowledge of a wide range of professional services. Underwriters must understand the exposures faced by each business—including the regulatory issues faced by those businesses—so they can arrange insurance to cover the risk in the broadest way possible.
Next, make sure you know what kind of form your proposed policy is on (claims made or occurrence) and know whether prior acts are covered. In many cases, especially for new businesses, prior acts aren’t covered and the inception date is also the retroactive date. On occasion, however, you will find policies that provide full coverage for prior acts. This is extremely beneficial for businesses that have been operating for some time but haven’t had professional liability insurance in place.
Finally, make sure any potential bodily injury or property damage liability exposures are covered. Typically, general liability policies won’t cover these kinds of claims if they arise out of a professional service, so it’s crucial that you address them. Some classes of business (such as physicians and dentists) have obvious bodily injury or property damage exposures that are addressed in professional liability forms, but others may not be so clear (such as pet groomers or barbers).
A solid defense
As you become more comfortable with professional liability policies, you should learn to look for some specific items that pertain to the defense of your client in a claim situation:
- Are defense costs inside or outside the limits of insurance? In most cases,m, defense costs erode the limit of insurance (therefore they are inside the limit). It’s a huge advantage to your client if you happen to find a form that covers defense outside the limit.
- Is the policy a duty to defend policy or is it a reimbursement policy? If the policy is on a duty to defend form, it’s the insurer’s obligation to defend any claim that is brought against your client. On the flip side, if it is a reimbursement form, your client will be responsible for selecting a law firm to defend it (sometimes the insured must choose from a pre-selected list of attorneys) and will be reimbursed by the insurer as legal fees are incurred and paid.
- What is the self-insured retention? In the professional liability world, this is the equivalent of a deductible. In short, it’s the amount the insured must pay out before the policy begins to respond. Professional liability policies can be daunting for individuals who are new to insurance. One learning method that I’ve found to be effective over the years is to compare two or three policies in a grid format:
|Comparison Point 3|
Using this method, you can “line item” each major comparison point, including (but not limited to):
- Duty to defend or reimbursement
- Defense inside or outside the limits
- Self-insured retention
- Definition of “loss”
- Definition of “professional services”
Not only does this method help you learn about the various policy forms you are working with, but when correctly prepared it also can serve as a marketing summary. Your client or prospect can then see all the work you’ve put into the account!
Taking the time to learn this area of commercial lines insurance can quickly give you a leg up on your competition and boost your production as a result. Feel free to reach out to the more experienced producers in your agency, as well as any brokers you use who specialize in this coverage, as they likely will share some insight that will allow you to hit the ground running.
Marc McNulty, CIC, CRM, is vice president of insurance operations at The Uhl Agency in Dayton, Ohio, and has been with the agency for 15 years. He divides his time among sales, marketing, technology and operational duties. Marc also serves as chairman of NetVU’s Young Professionals Chapter. You can reach him at email@example.com