Lessons on Liability
Financial rating services can track an insurance company’s financial health, which is important to know since it reflects the insurer ability to pay claims. Insurance carriers can be either “admitted” or “non-admitted.” An admitted carrier is licensed in the state your business is headquartered and is backed by the insolvency fund for that state. The insolvency fund is monies collected to aid policyholders in the case of an insurer’s inability to pay claims. A non-admitted carrier is not licensed or governed by the insurance commissioner of your state and cannot seek relief from the state’s insolvency fund. Non-admitted insurers charge a tax in addition to the policy premium.
It is important to understand each insurer’s experience in underwriting and servicing design professional’s Errors and Omissions coverage. An underwriter who specializes in land surveying firms will offer a better product and a better price than those serving general business. Likewise, a claims department that specializes in design firms or land surveying firms provides more efficient, cost effective claims handling, which saves money in underwriting, claims expense and payout—all of which is passed on to the customer.
Insurance brokers, too, should have track records in handling professional liability coverage for design professionals. Ask for a list of references. Find out what types of additional services the broker and insurance company provide, such as pre-claim assistance and contract review.
Professional liability pays for damages you are legally liable to pay as a result of negligent acts, errors or omissions in the performance of your professional services. General liability coverage is designed to protect against bodily injury and property damage to a third party. Conversely, bodily injury and property damage is not necessary to trigger coverage under the professional liability policy. For example, an error may cause a shopping mall to be built at the wrong angle resulting in five less parking spaces for one of the retail stores. There is no bodily injury or property damage, but the business income loss to the retail store will be addressed by the professional liability policy. To avoid confusion, it is most beneficial to purchase professional liability and general liability coverage from the same insurance carrier. This eliminates any disputes over coverage when a questionable claim is submitted. The Fireman’s Fund Insurance Company offers one of the few programs that incorporate professional and general liability coverage.
Professional liability is unique in that most policies are written on a claims made coverage form. Simply, this means that the policy must be in force when the claim is made. The land surveyor that purchases a policy for the period of time it takes to complete a specific job and then allows it to cancel is not purchasing adequate coverage. Most professional liability lawsuits are filed two to three years after a job is complete; thus, a policy should be in force for at least three years after a job is complete.
The claims made professional liability policy is further restricted by the retroactive date. The retroactive date is the first date the coverage was written on a continuous, uninterrupted basis. For example, if you purchased a policy from ABC Insurance Company on April 2, 1998, and continued to carry professional liability claims made coverage (whether coverage was provided through ABC Company or another insurer) without a lapse, the retroactive date should remain April 2, 1998. Jobs performed prior to the retroactive date will not be covered.
Many insurers offer Full Prior Acts coverage after three years of continued coverage. Full Prior Acts takes away the retroactive date provision of the policy, covering all work regardless of when it was performed. Since most lawsuits are filed within three years of the job completion, it follows that the insurer has a limited exposure to claims after three years of writing the policy. An insurer specializing in design professionals and land surveyors is more likely to offer the most favorable treatment of the retroactive date. The retroactive date on the insurance policy impacts the premiums paid. If there is a mistake on the retroactive date, correcting that mistake will result in a premium change, too.
In CourtDefense costs including attorney fees, bail bonds and other court costs are typically covered under a professional liability policy, though coverage is different. If you purchase a policy in which defense costs are included within the limit, you are subject to a decreasing limit of liability available to pay claims. The limit of liability will be decreased by the amount paid by the insurance company to defend a claim on your behalf. This can be unsettling when the land surveyor is sued for full policy limits. For example a $1,000,000 limit policy may have a $1,000,000 claim pending against it. On average it takes three years to finalize a lawsuit. An insurance company may pay $200,000 in defense costs over that period, which would be deducted from the limit of liability. This decreases the limit available to pay claims and further defense costs to $800,000. Remember, the insurance company’s obligation to you ceases once the limit of liability is exhausted either by defense costs or payouts to third parties. The insurance company in the example above would only be responsible to defend you up to the $800,000 limit remaining.
Alternatively, defense outside the limit can be more favorable. Some companies may offer defense cost coverage outside the limit up to a certain dollar amount. In other words, the defense costs would carry a separate limit, which would not impact the amount available to pay a claim. Another option (the most favorable treatment) would be defense costs outside the limit of liability. Using the previous example, the $1,000,000 policy with $1,000,000 claim and $200,000 in defense costs accrued, the limit of liability would remain at $1,000,000 to pay a claim to a third party. Regardless of what is paid by the insurer for defense costs, a defense outside the limit provision will not impact the limit of liability available to pay a claim. The Fireman’s Fund program offers this option in its coverage.
DeductiblesDeductibles can apply to defense costs (attorney fees and other court costs). In this case, you will be asked to pay the deductible towards the first dollars of defense in a claim. Some insurance companies will reimburse a portion of your deductible if the claim is settled finding no negligence on your part and when no payment is made to the claimant.
Another option is First Dollar Defense, in which the insurance company pays the first dollars of defense (you would not pay your deductible towards defense costs). If a payment is not made to a third party as a result of a claim against you, then you would not be asked to contribute your deductible at all. This is the most beneficial treatment of the deductible.