What You Need to Know About Professional Liability Insurance Coverage
Larry Hilton, Esq.
Dominion Insurance Services, Inc.
1. Why buy insurance?
There are two major exposures associated with litigation: attorney fees and indemnity payments. I was interested to read in a recent American Bar Association report that something in excess of 40% of all claims against attorneys are resolved without any indemnity payment (either settlement or judgment) being paid to the third-party claimant. However, in nearly every case defense costs were incurred.
Litigation regarding intellectual property is by its nature quite complex. It is typically a very paper intensive exercise, involving voluminous document production in discovery as well as expert witness engagements. This complexity translates directly into high defense costs. Therefore, in determining whether or not to protect yourself with insurance, it is important to factor in the potential cost of defending against frivolous or unmeritorious claims. That fact you hopefully have a very well run, exacting practice and can't imagine that any valid claim might be made against you is only part of the picture. This is a free country and anyone can file a lawsuit whether or not it is ultimately found to have a valid basis.
I noted that there was one suggestion that purchasing professional liability insurance would tend to make one more of a target for a lawsuit. I have heard some anecdotal comments over the years that may suggest some validity to this view. In reality having assets of any type (whether insurance or not) tends to raise one's “target” potential. Also, I would observe that whether or not you have purchased insurance is not a matter of public record. You would either have to tell the potential claimant that you do or don't have insurance, or they would have to file suit and then find out in the process of discovery what insurance might be available to satisfy a claim. Once the potential claimant learns about the unavailability of insurance he would likely pursue one of the following courses of action: (1) possibly abandon the claim; (2) determine what other assets you may currently have available to satisfy his claim and then decide whether or not to file; or (3) assume that because of the lack of insurance you will not defend (or at least not vigorously defend) against his claim, and so file suit planning to take a default judgment when you fail to answer. From a plaintiff's point of view taking a non-responsive defendant's default is very inexpensive. Also, in all jurisdictions of which I am aware, judgments can be periodically renewed. So once the judgment is entered it could be hanging over your head for the rest of your life. Thus, the claimant is likely to look not only at what assets you currently have but what your income potential is. Garnishing your wages or attaching assets you may obtain in the future are all options when it comes to the collection phase of litigation.
2. What limits of liability are appropriate?
This question might also better be rephrased as “what limits are available?” Since the hard market hit at the turn of the millennium, available limits have gone down markedly. Under our current NAPP® program the maximum limits we have available are $2mil/$4mil. There is, however, a consistently improving excess insurance market. So, higher limits can be obtained through buying an excess policy.
With regard to excess insurance, please note that an umbrella policy from your homeowners insurance carrier will not be excess to any professional liability insurance policy you purchase. This is because there is normally a business pursuits exclusion on such a policy. In addition, the liability part normally applies only to claims based on bodily injury, property damage or personal injury, not to injury arising out of negligent professional services.
In terms of determining an appropriate limit, there are several important considerations. First, you would want to select a limit that a potential claimant would take seriously in settlement discussions. The vast majority of claims are resolved by settlement, not trial. When the limits available are viewed as being reasonable for your type of practice, there is typically no big incentive to eye your personal assets. Moreover, your insurance carrier has a strong incentive to settle within the limits of liability so as not to run the risk of being exposed to extra contractual liability based on a theory of bad faith settlement. You would also want to have a limit of liability that is not significantly out of proportion to your personal assets. Again, this is to keep the claimant focused on your policy -- not your vacation home in the mountains.
3. How does coverage apply to claims which arise out of work performed before policy inception?
Nowadays virtually all professional liability insurance is written on a “claims made” basis. This means that coverage is triggered by a claim being made during the policy period or any extended reporting period following policy expiration. Another requirement of coverage is that the act or omission that gives rise to the claim must have occurred on or after the policy retroactive date which normally corresponds to the inception date of the first claims made policy purchased by the insured.
Claims made coverage should be contrasted with “occurrence” form coverage which like, for example, your auto policy is triggered by an occurrence during the policy period which may later give rise to a claim. Under an occurrence policy it doesn't matter whether the claim is made during the policy period or not. It is the occurrence during the policy period that counts.
4. How does tail coverage work?
Because claims made coverage applies only to actual or potential claims made and reported during the policy period, once the policy expires the ability to trigger coverage lapses. This is fine so long as you continue to obtain replacement coverage. However, what do you do when you retire? That is where tail insurance comes in. Tail coverage involves the purchase of an extended reporting period (ERP) endorsement which is attached to your last policy. The endorsement grants you the right to report to the carrier for some specified period of time any claims which may arise out of work you performed between your retroactive date and the expiration date of your final policy. Under the NAPP® program, Lloyds offers an annually renewable one-year tail endorsement. The cost of the initial ERP endorsement depends upon how long you have been insured with Lloyds under the NAPP program. Typically, an ERP costs between 100% to 150% of the expiring premium, i.e., the annual premium of the expiring policy. However, if you have been continuously insured with Lloyds under the NAPP program for the requisite number of years the cost of an ERP eventually comes down to 50% of the expiring premium. Thereafter, the ERP can be renewed annually for lower and lower premiums costs until you would hit the minimum premium for an ERP. At that point it would be the same cost every year to renew the ERP.
I hope these comments have been helpful. Please don't hesitate to contact me directly should any of you have any further questions or concerns. The email I check throughout the day is larry.hilton@dominioninsurance.com.
My toll-free phone number is (888) 313-9977.
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