Understanding Your Claims - Made Professional Liability Insurance Policy

Understanding Your Claims-Made Professional Liability Insurance Policy

by Paul Dorroh and Mary E. Whisenand

Editor's Note: This article is part 2 on common features and limits of professional liability policies (part 1 appeared in October), and part of a larger series on the topic of PL coverage in general. If you have ideas for questions you'd like to see addressed, and/or other sources of information, please feel free to contact me.

Considerations for the Individual Consultant

For those consultants in solo practice, the discussion included in October's article should prove generally accurate without further elaboration. Today, however, many consultants practice in firms of two or more, and there is increasing mobility between firms and practice settings. These consultants need to be aware of some special issues affecting their coverage for professional liability claims.

In all professional liability policies, the named insured is the firm. In the case of a sole practitioner, of course, the firm and the consultant are identical. With two or more consultants, however, the case is different. It is the firm which holds the rights and duties of the named insured under the policy, with respect to such matters as payment of premium, giving and receiving notices and exercising various options which may be available. Thus, while individual consultants may be protected under the policy, many of them know little about it because the matter is handled by others at the firm. Thus, consultants often have little idea who, if anyone, is providing their professional liability coverage, either currently or for prior acts, nor do they understand the scope of protection being afforded to them personally.

Regardless of the practice setting and any contemplated changes, take the time to know what professional liability coverage exists to protect you and your firm against claims. The following checklist may assist in better understanding these issues and avoiding unintended gaps or deficiencies in coverage:

• Try to recreate for your personal records a "Personal Insurance History" going back to the day you began private practice.
• If you are leaving one firm either to join another, or go into sole practice, request a copy of the old firm's current professional liability policy, as well as a summary of prior coverage while you were there. This will provide you with basic information you will need to obtain insurance on your own, as well as the ability to avoid gaps in coverage as you continue your practice elsewhere.
• If you are joining a new firm, be sure to determine the scope of prior acts coverage being afforded to you, and satisfy yourself that, when taken together with prior and continuing coverage from your old firm, the new firm's policy provides you with continuous protection for your entire practice, Generally, so long as your old firm continuously renews claims-made coverage, its policy would respond to claims against you based on your practice there. However, in some cases your new firm's policy may also provide you with prior acts coverage - an important consideration if our old firm should disband or merge into another without obtaining adequate tail coverage, or without notifying you of the change. There are also cases where your prior firm's tail coverage only applies to former members of the firm who are no longer engaged in private practice, not covering those who leave for another firm or to start their own practice.
• If your firm is dissolving, and there is no clear successor firm, investigate the available options for tail coverage, since you may find limited availability of prior acts coverage regardless of whether you establish your own practice or join another firm. One advantage of obtaining tail coverage is that your future practice (if you are establishing one) would normally be covered under a first-year claims-made rate, which will be much lower than the premium you would have to pay if your new insurance had to cover prior acts. One possible drawback is that the tail coverage for the dissolving firm may only provide a limited additional period of time to report claims arising from the dissolved firm's practice. The available policies vary in how much additional time they will offer, how much you have to pay for various time periods (although in some cases the policy does not guarantee the price for tail coverage), and what you must do to exercise your tail coverage options.

When purchasing or renewing a policy for yourself or your firm, it is important to provide the carrier with all the relevant information to help them give you the best pricing possible. Keep in mind:

• A complete Claim history is important. Reporting potential matters and claims to your carrier in a timely manner not only protects your coverage rights; it provides the carrier with the information needed to help you manage the situation. And it is not true that turning in a potential claim will automatically increase your insurance rates. A main function of the underwriter is to determine what situations are valid and which ones may only be nuisance cases. Obviously if there is a pattern within a firm's potential claims an underwriter may choose to recommend risk control procedures or take rating action.
• Provide information on your internal systems and processes. Even if you have provided this information on past applications, let the carrier know what improvements you have made. For an underwriter, knowing a firm's internal procedures can make a definite impact on how the overall risk is viewed.

Retirement

Special considerations exist for professionals who are retiring from practice, or entirely ceasing private practice due to health considerations, to pursue another occupation or for other reasons. Although no longer actively practicing, such professionals do need continuing insurance protection for claims that may be asserted after retirement based on occurrences while still in private practice.

For professionals retiring or withdrawing from a firm that continues to carry professional liability insurance for the ongoing practice, coverage is usually afforded automatically under the policy of the firm, so long as it continues to be renewed. Even if the firm switches carriers, the retired professional is usually covered so long as the new carrier is providing prior acts coverage. The retired professional shares in the coverage afforded the firm with respect to limits of liability and deductibles.

Such an arrangement is often satisfactory where the continuing firm is stable and well established, and can clearly afford to continue carrying coverage. The retiring professional should, however, consider the following factors:

• What is the likelihood that the firm would ever discontinue carrying professional liability insurance?
• If the firm no longer carried a policy protecting the retired professional, would other sources of coverage be available?
• Does the firm's policy provide retiring professionals the option to purchase on an individual basis an extended reporting period endorsement? (Some policies do provide this option, which would continue the coverage as to the retired professional regardless of the firm's discontinuance of the policy.)

Practice Management and Claim Prevention

The experience of the insurance industry with the modern claims-made policy for professional liability insurance since the 1970s has been positively affected by the efforts of numerous professional groups to educate their members in claim prevention and risk management. Although there is no way to measure the number of claims that were not made as a result of such efforts, there is ample statistical support for these basic conclusions:

• by altering their patterns of behavior in professional practice settings, professionals can reduce the likelihood that a claim will be made against them for professional negligence;
• the methodology for pricing claims-made insurance coverage permits the insurer to recognize savings from claim prevention earlier than if the insurer were writing occurrence coverage, and many insurers have exhibited a pattern of passing through much of the savings to their insureds in order to be competitive.

Claim prevention requires an organized, structured effort to adapt procedures and patterns of practice to the perceived likelihood of claims that could result from the particular area under discussion. The following is a brief summary of major areas of interest and attention in a risk management program.

Substantive competence

When professionals fail to keep up with current developments in their areas of practice or accept engagements which require expertise or levels of commitment of time, personnel and administrative support beyond the capabilities of their offices, claims are more likely to occur.

Time management

Every business and professional practice must manage time and deadlines. Poor time management practices also lead to stress and disorganization within the office, which enhance the risk of claims of all types. The essential objectives of a good time control system include (1) centralization, to make sure that all key dates and events are entered, (2) redundancy, to make sure there is a "fail-safe" backup to alert responsible professionals even in the absence of regular personnel, (3) cross-checking on a regular, frequent basis, to be sure that all calendars reflect the same dates and events, and (4) follow-up, to be sure that all dates, and events are actually communicated to the responsible professional(s) as intended.

Widespread availability of inexpensive personal computers and software for time management makes it more feasible, and thus more important, for the office to develop and maintain time control systems.

Ethical considerations

Effective procedures to identify and avoid conflicts and other ethical problems can prevent claims. Many professional groups provide their members with a toll free "ethics hotline" from which members can obtain references to authoritative sources dealing with particular ethical issues.

Administrative management

In many ways a sound office management system is the underpinning for claim prevention. Claims are more likely to arise where the practice fails to deal effectively with such seemingly mundane matters as handling of mail and telephones, filing and record keeping. Sound administrative management systems and procedures are also key to effectively dealing with other critical risk management issues such as time management and avoidance of conflicts.

Financial management

Numerous claims arise because the firm does not properly manage its receipts and disbursements, or adequately account for them. Fee disputes with clients are a particularly fertile source of claims, and one of the best ways to avoid such claims is to avoid having large outstanding receivables. Doing so requires effective time keeping and billing procedures, as well as regular and prompt attention to overdue items by a responsible person within the firm.

Professional education and development

Proper selection, training, supervision and continuing education of both professional and non-professional personnel can help to avoid claims. The professional's emphasis should not be merely on meeting the minimum requirements, but on developing and maintaining knowledge and skills that will support high quality services for clients.

Assistance programs

Professionals with personal difficulties such as stress, financial, family or substance abuse problems, are more likely to engage in behavior that leads to claims, whether by neglect of professional matters or errors in judgment resulting from preoccupation with personal issues.

• � 1991-1997, Kirke-Van Orsdel, Inc.
• � 2000, Seabury & Smith

Marsh Affinity Group Services 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.

Paul Dorroh, J.D. and Mary E. Whisenand, AR, RPLU, are with Marsh Affinity Group Services.