A recurring risk for licensed professionals remains the threat of liability claims arising from their work. Given the nature of the professional's practice, the claims are complex and costly, regardless of their merit. Therefore, professional liability insurance is a critical component of any professional's practice.
Professional liability insurance continues to be a significant expense. Consequently, it has been our experience that the premium is often the biggest driver in policy selection. But selecting professional liability insurance based on cost, to the exclusion of an analysis of coverage, has its own negative economic consequences. Securing the best coverage, at the best price, requires examination of certain critical factors.
Insure the Right Risk.
Don't assume insurers will voluntarily cover every claim arising from the professional's performance of a compensated act for a client. Many professionals provide a blend of professional services, whereas liability policies are designed to cover risk arising from the traditional practice of the profession. For example, lawyers often give operational advice to their business clients and architects are asked to provide construction advice. Whether claims arising from the performance of these "non-traditional" acts are covered will depend on the policy in question, so review the policy before binding. Also, if you are a professional that regularly engages in "non-traditional" acts - e.g., a lawyer that prepares clients' tax returns - confirm that undertaking is covered.
At the same time, if you are in a management position of a professional firm, know what services your partners and employees are providing. Commit client engagements to writing in order to provide an express statement about the scope of services performed. Counsel your professionals to avoid "dabbling" in areas outside the standard scope of the profession.
Identify the Earlier Actors.
The insured will generally benefit from the early resolution of claims before suit, if reasonable. For instance, many policies will offer reduced deductibles for claims that are resolved before they become lawsuits. Further, because many policies give the insurer the right to control the defense of a claim, which can include when and whether to settle, be sure to perform substantial upfront research with a trusted insurance broker to determine how the insurer handles claims. Not every claim deserves to be settled. But even if it is likely that any judgment in a lawsuit would be paid by the insurer, lawsuits require time and money from the insured that are likely better invested in other areas of the professional's practice.
Implement Loss Control Procedures.
Like all liability insurance, the price of the premium on a professional liability policy is impacted by the insured's claim history. While not every claim can be avoided, many can. Further, insurers will likely provide price breaks for implementation of enterprise-wide risk mitigation procedures. Identify the "types" of mistakes that most often lead to claims, and implement procedures that respond to that risk. Your current insurer, or a sophisticated insurance broker, likely can perform an "audit" of the practice to help identify risks and implement programs. Ask for it.
Know What The Insurer Pays For.
Many allegations against professional firms include claims that are both covered (for example, professional malpractice) and uncovered (for example, fraud) by the professional liability policy. Therefore, a number of insurers include allocation provisions that attempt to allocate the indemnity and defense costs between covered and uncovered claims. These provisions can generally be negotiated, and the most favorable language for the policyholder allocates 100% of the defense costs to the covered claim. Failing that, work hard to ensure there is an equitable and objective method of allocation, which both sides understand.
Check the Time.
Almost all professional liability policies are "claims made" policies, insuring only those claims made within the policy year in question. Such policies also contain "retroactive dates," which exclude coverage for acts that occur prior to a certain date. The interaction of the claims made policy with a retroactive date is particularly important when a firm hires new professionals. Some insurance programs will not cover the professional for acts committed for an earlier employer. At the same time, the previous employer's policy may not cover the professional for claims filed after the professional leaves. A professional sued while affiliated with the new employer, for acts committed at an earlier job, may be without insurance. Arrangements can typically be made to provide coverage, but only if the professional and the firms identify the issue before a claim arises.