Daniels-Head Insurance Frequently Asked Questions

The professional liability policy is designed to protect an insured member of the policyholder from catastrophic financial loss. In the event the professional is sued for malpractice and becomes legally obligated to pay damages, the professional liability carrier will:

• defend the insured in the suit; and
• pay damages the insured becomes liable to pay, up to the limits of liability, less the deductible, and subject to the policy terms, conditions and exclusions.

The answer is an absolute, "Yes!" Professionals may spend years practicing law and may feel that in their type of practice they will never be sued. Mistakes can and do occur with alarming frequency. Even the most careful professional can make a mistake in judgement in the day to day practice of law. Any lawyer can be sued when a statute is missed or due to a seemingly simple error in a title search or estate planning document.

Furthermore, you do not actually have to commit an error to be sued. In today's litigious environment, even a perceived error could trigger a suit from an unsatisfied client. You depend on your reputation for your livelihood. You should consider a lawyers' professional liability policy to help you protect something that has taken you a lifetime to build.

"Claims made and reported" is a type of insurance policy form in which two separate dates are important:

• the date the act or omission occurs
• the date the insured becomes aware of the act or omission and reports the claim.

A policy written on a "claims made and reported" basis is designed to cover claims made and reported during the policy period. Coverage must be in force not only when the claim is reported but also when the alleged act, error or omission that results in a claim occurred, or there is no coverage. A claim is deemed to have been made if the attorney is actually served with suit papers, or if the attorney becomes aware of a situation that could reasonably result in a claim. A "claims made and reported" policy requires the attorney to report the claim or potential claim to the insurance carrier within the same policy period as the claim is made.

Although a claim may be made against an attorney at any time, the act or omission giving rise to the claim most likely occurred sometime in the past. The act, error or omission covered by the policy must have occurred on or after the policy's "prior acts exclusion date." This date is usually shown on the declarations page or on an attached endorsement. It is sometimes referred to as the "retroactive date." There are various reasons that an insurance company would attach a "prior acts exclusion date" to a policy. These could include:

• the insured does not currently have insurance coverage;
• the insured has purchased an extended reporting period (ERP or "tail") coverage from another carrier;
• the insured has left a firm to start their own practice; or
• the insured is joining a currently insured firm but he either has no prior insurance, or is relying on coverage under a former firm's policy.

It is extremely important! This is the document that the company relies on to determine coverage options and the extent of limits, deductibles, prior acts coverage, etc. It is important to complete all of the application; don’t leave anything blank. Be truthful. The application often becomes part of the policy. If you withhold relevant information, the company may have grounds for voiding your policy. Please contact us for assistance in the completion of your application documents if you have any questions.

Most insurance companies break down claims payments into two categories:

• the cost to defend the claim; and
• the actual damages paid to the claimant.

"Defense inside the limits" means that the cost of defending the claim and the actual damages paid are all part of the "per claim" limit of liability.
"Defense outside the limits" means that the cost of defending the claim is in addition to the per claim limit of liability. Often, an insurance company that offers this option will cap the total amount it will pay in defense costs to the each claim limit of liability. Because of the additional amount of coverage available, the "defense outside the limit" option is usually more expensive than the "defense inside the limit" option.

Many professional liability policies only cover services performed "on behalf of the named insured." This means that services performed for the current firm would be covered, while services performed prior to joining the current firm would not be covered. Other policies cover all services performed. Policies that provide coverage to insureds for their professional services performed at prior firms are said to give "lateral hire" coverage.

It is important to read the policy form to determine whether services performed at prior firms will be covered. This type of coverage information is usually found either in the definition of the "insured" or in the "insuring agreement" portion of the policy.

The retroactive date establishes the date from which the insurance carrier is covering the actions of an insured. The premium that the company charges will increase each year to cover the increase in exposure. If the insured has a prior acts date that is equal to the effective date of the policy (for example, January 1, 2009), the insurance company is only covering those errors committed by the attorney since that date. Because there is less exposure during the first year of coverage, the insurance company charges a lower premium to cover its risk. The next year (January 1, 2010), the company covers more time (year 1 + year 2) and therefore, will charge a higher premium. These "steps" in premium continue to increase annually, ultimately capping at the "mature premium," which averages anywhere from six to eight years from the retroactive date.

The deductible is the amount of money that the insured is required to pay out-of-pocket. A "per claim" deductible is one in which a specified amount applies to each and every claim. An "aggregate" deductible is the total amount the insured is required to pay during the policy period, regardless of the number of claims. Because of the additional insurance exposure, the “aggregate” deductible option is usually more expensive than the “per claim” deducible option. This is often subject to underwriting approval.

There are also “loss only” deductibles available. This means that the deductible is not subject to defense costs and is only paid if there are actual damages (indemnity payments) paid. The “loss only” deductible is also usually offered with an additional premium and is often subject to underwriting approval.

Because of the nature of "claims made and reported" coverage, once the policy has expired, cancelled or non-renewed, coverage ceases to exist for any claim that may arise after the expiration or cancellation of the policy. To address this issue, most insurance carriers offer to qualified firms, for an additional premium, endorsements (called extended reporting period or "tail" endorsements) that extend the time for a firm to report claims to the insurance carrier. "Tail" endorsements are often purchased when a firm is dissolving or an attorney is retiring. This endorsement can provide peace of mind that a claim which arises from an act or omission made by the insured prior to the end of the policy period, may still be reported to the company after the end of the policy period.

A "per claim" limit of liability is the maximum that the insurance company will pay on behalf of an insured for any one claim. An "aggregate" limit of liability is the maximum the carrier will pay on behalf of an insured during the policy period, regardless of the number of claims. Both of these limit amounts are usually listed on the declarations page.