Writing Professional Liability: Make sure you know the language!

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

While traditional lines of business (Auto, Homeowners, BOP, Workers Compensation) require a solid understanding of the coverage forms, in many respects Professional Liability is in a class by itself. To begin, the coverage is traditionally written on a claims-made form, as opposed to the occurrence form
used on most other lines of business. In addition, it is widely acknowledged that no two forms are the same; this makes coverage comparisons very detailed. Moreover, the terminology is unique, with terms like “retro date,” “full prior acts,” “extended reporting period” and “consent to settle,” just to name a few. As you will note in the claim discussed below, mistakes can occur and they can be big!

When one thinks of Professional Liability, oftentimes the following classes of professional business come to mind: Real Estate Agents, Lawyers, Medical Professionals, Accountants and Insurance Agents. While these are some of the more common, there are more than 100 additional professional occupations –including Appraisers, Engineers, Pharmacists, Court Reporters, Speech Pathologists, Consultants, Therapists and Teachers – that have a Professional Liability exposure. With many of these classes, the General Liability carrier will include a Professional Liability exclusion as it is not their intent to protect that segment of the client’s business.

Regarding the coverage form, most (but not all) Professional Liability carriers provide this coverage on a claims-made basis, which means that claims reported during the policy period are covered provided the actual error (which could have occurred months or years ago) was after any applicable retro date (more on this shortly). On the other hand, an occurrence policy (your traditional GL coverage) covers claims that occur during the policy period. Therefore, the difference is that one form factors in when the claim was reported, while the other form deals with when the claim actually occurred.

Retro Date vs. Full Prior Acts – This is an extremely important concept that will have a huge impact on whether the claim is valid. Using Agents E&O in our example, for a claim to be valid, the error committed by the agency (example: failure to put collision on a vehicle) must be after the retro date. If it was before the retro date, no coverage would be provided. The retro date is typically shown on the face of the policy. If the declarations sheet states “Full Prior Acts” or “None” in the area where a retro date would be noted, this essentially means there is no retro date and the insured is protected for errors made regardless of when they were committed. The following E&O claim illustrates this well:

The agency's client, a real estate agent, had a claims-made Real Estate Professional Liability policy which was non-renewed based on loss history. The real estate agent made a conscious decision not to replace the coverage due to pricing concerns, as the premium would have been 4 times higher with a new carrier. He later changed his mind and procured a new claims-made policy with a retro date even with the new policy's inception date. The client was sued for a loss where the alleged wrongful act occurred during the period covered by the expired policy and prior to the new policy's retro date. The new carrier disclaimed based on the retro date, and the client was forced to spend $211,000 defending himself. The agent never advised the client to purchase a “tail” for the old policy, which would have covered the loss had a tail been in place. In addition, the agent did not fully explain how the “newer” retro date would affect claims based on older wrongful acts. The claim against the agent was settled for $200,000.

As this claim also points out, defense costs in this line of business can be significant. A word of caution: if your client states they want to reduce their premium and would be willing to take a “current” retro date,” this should be emphatically discouraged as this leaves a significant gap in protection. This is also strictly prohibited in many states.

Some other issues/differences to be aware of:
Virtually all of the policy forms are different, even within the same class of business. Therefore, a Lawyers Professional Liability policy with Company A may be significantly different than a Lawyers Professional Liability policy with Company B. If you are looking to move your client to a different carrier, analyze the two policy forms and be sure to bring any differences to the customer’s attention. Oftentimes, the new carrier may have a coverage comparison form that will be of benefit.

Defense provision – Policies may be written with “Defense in addition to the Limit of Liability” or “Defense within the Limit of Liability.” If the Defense is “within the limit,” any dollars spent defending the customer will impair (reduce) the limit available for any settlement/judgment. Defense (unlimited) in addition to the limit of Liability is the broadest.

Deductible – This may be on a loss-only basis or on a combined basis. With loss-only coverage, the insured would not participate in any claims defense, litigation or claims-handling expenses associated with the claim; these would be handled by the carrier. Conversely, with a combined loss and expense deductible, the insured would participate in these expenses up to the deductible limit. Make sure your customer knows their obligation.

Extended Reporting Period – This is often called a “tail.” While virtually all claims-made policies contain this provision, this does not mean there is consistency among carriers as to the available options. Using agents as the example, if an agency sells its business to another agency, the seller would buy a tail. This provides an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. In the claim example cited earlier, the agent should have advised the real estate agent to buy a tail to protect him for any claims that subsequently were made against him.

Receipt of the policy – When you send out/deliver the policies, always advise your clients to review the policy to ensure everything is in order. Obviously, the agency should also review the policy to make sure it matches what was requested.

If you handle Professional Liability (also called Errors and Omissions), understand its uniqueness – the terms and the coverages. It is unlike most other forms of coverage. In addition, educating your customers is recommended and will certainly have solid benefits.