Managing and Insuring Professional Liability Risks

Managing and Insuring Professional Liability Risks

by Mary E. Whisenand

Editor's Note: In our last two issues (October 2006 and January 2007), we ran a series of articles contributed by Mary Whisenand that explained how to understand some of the common features and limits of professional liability insurance policies. Here we conclude that series with some other tips and checklists that can help professionals minimize their liability risk and evaluate their coverage needs and options for their remaining risk.

AREAS OF PRACTICE FROM A LIABILITY INSURANCE PERSPECTIVE

There are three main areas any carrier will consider when underwriting a consulting firm for professional liability (malpractice) insurance. They are the firm's past claim history, their systems and procedures, and their areas of practice. This is why many carriers use an additional supplement for a specific area of practice in their underwriting review.

The amount of consideration given to each category often varies from one carrier to another. Indeed, some carriers will change their focus depending on their overall claim experience. Professional liability insurance rates are determined by an actuarial study of the areas of practice and the claims stemming from those specific areas of practice.

It is important to know that most professional liability insurance products do not restrict coverage to cover ONLY those areas of practice listed on an application. The majority, if not all, of the insurance companies are insuring a consultant for their professional services and the performance (or lack thereof) of those services. Some companies write their policy form to exclude the more hazardous areas. Others may restrict coverage through the use of specific endorsements that are attached through the underwriting process.

Only the consultant can determine how confident they are in a given area of practice to meet the commitment of being their client's advocate. Knowing their limitations is important. Strictly from an underwriting perspective a carrier would prefer to see a consultant concentrating in a few areas of practice where they can thoroughly know the business and procedures as opposed to looking at an application that has a broad range of areas. However, insurance carriers are aware there are business considerations for a consultant, especially the sole practitioner, who may not be in an economic position to turn away business.

There are alternatives available such as associating on a case by case basis with a consultant who specializes in a certain area of practice or using a referral fee system with other firms. It may be in a firm's best interest to develop a network of firms that can share their level of expertise in certain areas. All parties win when clients are served, firms are profitable and insurance carriers are involved in fewer claims.

RISK MANAGEMENT TIPS

As the professional liability insurance market continues to change, professionals are faced with new underwriting restrictions, policy limitations and carrier requirements. Here are some tips to consider when evaluating your firm's risk management practice and procedures. Following these tips does not prevent claims. The information is presented as a tool to educate firms on why malpractice insurance carriers ask certain questions and to help identify practice procedures that help minimize the threat of a legal malpractice action. It is not intended to prevent any legal malpractice action. It should be used only as a guide for implementing procedures that could lead to the avoidance of such actions.

CLIENT / CONFLICTS OF INTEREST

Knowing how to check for and identify conflicts is essential to avoid a legal malpractice claim. Having a good client intake form is an excellent first step. In addition to the basic client and case information, client intake forms should contain the following:

• Prior consultants consulted about the proposed case.
• How the client chose your firm (referrals, advertising, etc.)
• Fee and Billing arrangements.
• Does the firm have the expertise to handle the request?
• Are the Client's goals and expectations reasonable?
• Does the firm have the necessary staffing?
• Can the firm afford a contingency fee arrangement, if applicable?
• What red flags appeared during the initial interview?
• What are the time sensitive deadlines? Can the firm meet them?

ACCEPTING CLIENTS and/or CASES

Some items to keep in mind when considering an assignment include:

• Beware of clients who are changing consultants.
• Beware of clients who have unreasonable expectations.
• Think twice if the client tries to negotiate or is difficult about the cost of services.
• Trust your first instinct if your impression of the client or the case is unfavorable.
• If you must decline an account, always decline in writing. Avoid giving any recommendations or opinions on the account.

ENGAGEMENT AGREEMENTS

Important items to have in your agreement are:

• Client and consultant identity.
• Address any conflict of interest issues.
• Scope of service.
• Responsibilities of consultant and client.
• Communication methods (use of cell phones, encrypted e-mails, calling ahead to notify client of fax communications being sent).
• Fee arrangement including what expenses the client will pay. Retainers, when/how often are they refreshed.
• Billing format, cycle payment expectations, including interest.
• Retainer terms.
• Withdrawal for non-payment.
• Arbitration provisions if a dispute arises, including binding provisions.

SUITS FOR FEES

The practice of suing clients for unpaid fees often results in cross-complaints for malpractice. We suggest doing the following before bringing a lawsuit to collect outstanding fees:

• Consider the cost of litigation and the time involved.
• Consider the possibility of a malpractice cross-action and address these issues:
  • Have the underlying file reviewed for malpractice claim potential.
  • The fees sought to be collected should be substantial.
  • Assess the result you achieved for the client in the underlying case.
  • Assess whether your relationship with the client was good prior to the fee dispute.
  • Has the statute of limitation on a potential malpractice action run?
• Consider the factors in collecting the judgment.

Some firms utilize a procedure of using larger retainers, or a series of follow up letters with the periodic billing statements to help recover fees. Others will use a collection agency to pursue the matter before an actual suit is filed against the client. A final step is withdrawing from supporting the client.

QUESTIONS TO ASK AND ANSWER WHEN REVIEWING COVERAGE OPTIONS

No one can anticipate every situation or what specific carriers may ask of their applicants. Each carrier has its own underwriting criteria and decision-making process and you should confirm with your own carrier what they require. The following checklists can be used as a guide on what to provide to a carrier and what to look for when comparing coverages between one or more insurance companies.

• What Professional Services are covered?
• Who is covered? Are my staff and independent contractors covered by the policy? If not, can they be added to the coverage? What about members of the firm who have left or joined during the policy year? How does coverage apply to them? Verify if there is a time restriction on reporting changes to the carrier.
• Am I covered only for what I do on behalf of my firm or do I have coverage for all professional services? For example, if I speak with my neighbor or civic group outside the context of my employment to the firm and I'm sued, is this type of advice considered professional services?
• What period of time is covered? If you have been in practice many years, chances are you have full prior acts coverage. But if you have recently started your own practice or changed from one firm to another you should clarify if the insurance carrier is giving you "prior acts coverage."
• What are my options for Extended Reporting Period Coverage (commonly called "Tail Coverage")?
• What exclusions are in the policy? Often this is a missed area of the contract. Knowing what isn't covered is as important as what is covered.
• How does my deductible apply? Ask if it is applied to each and every claim or only paid once through the annual policy year. Do you have to satisfy the deductible if the matter only incurred defense costs?
• How are claim expenses handled? The term "Claim Expense Inside" means that the amount available to pay a claim is reduced by claim expenses. Under this option every dollar over the firm's deductible that is used to defend the firm is applied to the Per Claim Limit. Another common term for this is "diminishing limits." The reverse of this is to have Claim Expense Outside, which can take several forms. The important distinction, though, is that at the end of the day with "Claim Expenses Outside" you will still have your full limit available to pay towards a judgment or settlement.
• Financial stability and long-term viability of the carrier will be important when choosing a professional liability carrier. Ask for their A.M. Best rating or view it for yourself at their web site.

Mary E. Whisenand, AR, RPLU, is a client executive with Marsh Affinity Group Services, which administers insurance coverage products that can be purchased through the SOA. For more information on their professional liability insurance offering to SOA members, you can call 800.323.2106 ext. 34479, e-mail , or visit their web site.

This article is for discussion purposes only. Use of any portion of this information will help to establish clear expectations between attorneys and their professional liability insurance carrier. It will not, however, provide absolute protection against a malpractice action. � March 2003 and July 2004 Marsh Affinity Group Services, a Service of Seabury & Smith. All rights reserved. Reproduction in whole or part without written permission is strictly prohibited.