Professional liability insurance is recognized as essential for practice in a wide variety of professions. Individuals and groups dare not be without it. Care and accuracy in completing the application for professional liability insurance is essential to assure continuous protection and preserve professional liability coverage for individuals and organizations. There must be no material misrepresentation that could be the basis for proper denial of coverage by the insurer in the event of a claim.
An application for accountants professional liability insurance currently used by a major insurance company includes the following statement above the line for the applicant's signature: "The undersigned is authorized by and acting on behalf of the applicant and represents that all statements and particulars herein are true, complete and accurate and that there has been no suppression or misstatement of fact and agrees that this application shall be the basis of coverage and become a part of any policy issued by the company."
Similar acknowledgments are part of the professional liability insurance applications required by other insurers.
The United States District Court, Western District of New York provided us, in 1985, with a graphic warning of the consequences of material misrepresentation in professional liability policies designed for professions other than the health care professions. (Prior to that time such problems generally had been associated with health care professionals.) The case is briefly identified as INA Underwriters Insurance Company v. Forde & C., P.C.
The issue in the case was whether or not two innocent members of an accounting firm (as well as the firm itself) were protected by an accountants professional liability policy. The president of the firm had completed an application for the insurance without informing the insurer about claims or suits or conditions that might give rise to claims or suits. The court said: "It is the well-established law of New York State that material misrepresentations made in an application for an insurance policy render the policy void ab initio."
Acknowledging the unfortunate position of the two innocents, the court concluded that a contrary decision would result in great hardship for the insurer. It, too, was an innocent party and would not have issued the policy had the true facts known. Judgment was rendered for the insurance company and against all insureds.
Recent cases underscore the fact that an application must be completed truthfully, accurately, without omission of pertinent information, and with care and understanding of its importance. Among them are:
* International Surplus Lines Insurance Company v. Wyoming Coal Refining Systems; United States Court of Appeals for the Tenth Circuit; April 1995. The court concluded that a research firm misrepresented material information about a potential claim in its application for professional liability insurance. Its client, a designer of coal mining systems, was dissatisfied with research provided over several years and threatened legal action before the application for insurance had been made.
* Booker v. Blackburn; United States District Court, New Jersey; November 1996. Coverage under civil engineers professional liability insurance was rescinded on a finding of material misrepresentation in the application when the applicant responded in the negative to questions about circumstances that could lead to a claim and legal actions that had been brought. Its client, the University of Pennsylvania, had complained of faulty structural designs and gave notice of preparations for legal action before the engineering firm applied for insurance.
Mt. Airy Insurance Company v. Angst & Associates; U.S. District Court for the Eastern District of Pennsylvania; January 1997. The court found overwhelming evidence that the president of a law firm had knowledge of substantial misappropriation (his own) of estate funds and submitted his firm's application for professional liability insurance, knowing his statements were false. The insurer had no obligation to the insured under the policy, which was void.
Further details of any of the aforementioned court decisions will be provided on request.
An agent or broker may provide basic or general particulars in an application for professional liability insurance, such as name of applicant, organizational structure, and address, notably when there are files relative to other insurance written for the client. But critical underwriting data, which includes most of what is in an application, must be in the words of the applicant's official representative.
An applicant for this vital insurance must be advised to complete the application with great care, allowing time for doing so completely and accurately, let alone truthfully. The acknowledgment above the signature should be pointed out without fail. This emphasis can minimize problems. The signature of the applicant or authorized representative affirms all statements in the application, regardless of who provides the information. An agent or broker must never sign an application for professional liability insurance for the applicant, for any reason. *
©COPYRIGHT: The Rough Notes Magazine, 1998