Frequently Asked Questions about Professional Liability Insurance from Michigan Lawyers:
Q: What is a “Professional Liability” Policy?
A: Professional Liability is the same as Malpractice insurance is the same as Errors & Omissions (E&O) insurance is the same as Legal Liability insurance; all different names for the same thing. Like any other insurance policy, the professional liability policy is designed to protect an insured professional from possibly catastrophic financial loss through malpractice. Malpractice occurs when the professional either does something incorrectly or fails to do something that the standards of the professional dictate should have been done. In the event the professional commits malpractice and becomes legally obligated to pay damages to a third party, the professional liability policy will defend the insured in the suit and will pay any damages they become liable to pay, up to the limit of liability of the policy, less the deductible.
Q: Is Professional Liability insurance necessary even in a small, local practice where most clients are well known?
A: The answer is an unqualified “yes”. Although professionals may spend years practicing law, and may feel that because of the type of practice they have they will never be sued, mistakes can and do occur with alarming frequency. Even the most careful and prudent professional can make a mistake in judgment in the day-to-day practice of law. Even very small practices can be sued when a statute of limitations is missed because the attorney was misinformed about the deadline, or when a title search is reported incorrectly and a real estate deal falls apart.
Q: What does “claims-made and reported” mean?
A: Three separate dates are important in this type of insurance coverage:
- the date the act or omission occurs
- the date the Lawyer becomes aware the act or omission has occurred, and
- the date the Lawyer reports the claim to the insurance company.
A policy written on a “claims made and reported” basis is designed to cover claims made during the policy period even if the mistake which gives rise to the claim occurred prior to the policy period (subject to any prior acts or retroactive date). 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 a reasonable person would deem to become a claim. A “claims made and reported” policy requires the attorney to report that the claim or potential claim made to the insurance carrier within the same policy period as the claim is made.
Q: What are “prior acts” dates?
A: 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 or omission giving rise to the claim covered by the policy must have occurred on or after the prior acts date. The date is usually shown on the declarations page and is sometimes referred to as the retroactive date. There are various reasons that an insurance company would use a prior acts date.
Some of the most common are:
- 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 a practice.
- The insured is joining a currently insured firm and either has no prior insurance or is relying on coverage under the policy of a former firm.
Q: What is “step rating” and how does the prior acts date tie into this rating?
A: Because the prior acts date limits the time that the insurance carrier is insuring the actions of an insured, the premium the company must charge must increase every 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, 2000), the insurance company is only covering those errors committed by the attorney since that date. Because there is less exposure, the insurance company does not need to charge a high premium to cover its risk. The next year (January 1, 2001), the company is covering more time – now, two years – and therefore needs to charge a higher premium. The “steps” in premium continue to increase yearly, finally capping at the “maximum step”, anywhere from six to eight years from the prior acts date. This is sometimes referred to as the “mature” premium.
Q: What is an “Extended Reporting Period” endorsement or “tail” coverage?
A: Because of the nature of claims made coverage, once the policy has expired or been cancelled, coverage ceases to exist for any claim that may arise after the expiration or cancellation of the policy. To address this issue, insurance carriers provide endorsements (called extended reporting period endorsements or tail endorsements) that extend the time a firm may report a claim to its insurance carrier. Often used when a firm is dissolving, or an attorney is retiring, this endorsement provides peace of mind against a claim that may arise from an act, error or omission made by the insured prior to the end of the policy period. It may still be reported to the company if a claim is made after the end of the policy period.
Q: What is the difference between an “each claim” limit of liability and an “aggregate” limit of liability?
A: An “each claim” limit of liability is the amount of money available to an insured for any one claim. The “aggregate” limit of liability is the amount of money available to an insured for an entire policy period, regardless of the number of claims. Both these amounts are usually listed on the declarations page.
Q: What is “defense inside the limits” versus “defense outside the limits”?
A: Most insurance companies break down the cost of coverage into two categories: the cost to defend the claim and the actual damages paid to the third party. “Defense inside the limits’ means that the cost of defending the claim and the actual damages paid are all part of the “each claim” limit of liability. Defense outside the limits” means that the costs of defending the claim are in addition to the “each claim” limit of liability. Often, an insurance company that offers this option will cap the total amount it will pay in defense costs to an identical limit of liability. Because of the additional amount of insurance available, the “defense outside the limit” option is usually more expensive than the “defense inside the limit” option.
Q: What is a deductible and what are the various types of deductibles available?
A: The deductible is the amount of money that the insured is required to pay before the company pays out any money. A “per claim” deductible is one in which the amount shown applies to each and every claim. An “aggregate” deductible is one in which the amount shown applies only once during the policy period.
Q: What is “lateral hire” coverage?
A: Many professional liability insurance policies only cover services performed “on behalf of the named insured”. This means that those services performed for the current firm would be covered, while those services performed prior to joining the current firm would not be covered. Other policies cover all services. It is important to read the policy form to determine whether services performed prior to joining the current firm would be covered. The type of coverage is usually found either in the definition of an “insured” or in the “insuring agreement” of the policy.
Q: When should I report a claim?
A: The following are examples of when a claim should be reported:
- When you initially become aware of a bar complaint/grievance filed against you, as this is a potential claim.
- As soon as you have been served with notice of a lawsuit.
- If a client, past or present, threatens to sue you.
- If you realize that you have made a mistake that will adversely affect a client.
Q: How should I report a claim?
A: Most companies will tell you specifically, either within the policy or on the declarations page, who to contact in the event of a claim. If you cannot find this information, your insurance agent will be able to assist you.
Q: Who is insured under the policy?
A: The law firm itself is insured under the policy. All attorneys who are members of the firm or were employed by the firm on the first day of the policy, all attorneys who join the firm during the policy period, all attorneys who were members of the firm, all “Of Counsel” attorneys, all employees of the firm and the estate of any attorney who died while employed by the firm, are covered.
Q: What is a “part time” attorney?
A: “Part time” is usually defined as an attorney who provides legal services on behalf of the insured law firm, but who works 26 hours per week or fewer. An attorney working more than 26 hours per week is a “full time” attorney.
Q: What is an “Of Counsel” attorney?
A: “Of Counsel” attorneys may play many roles in a firm. In general, however, an “Of Counsel” attorney is one who is appointed by the firm as “Of Counsel” to the firm and has a specific role within the firm. Often this role is one of expertise, either in a particular area of the law or due to the fact that they have been a member of the firm for many years. “Of Counsel” attorneys are covered under most policies, but only for services performed on behalf of the named insured. They are not covered for any legal services they may provide for entities other than the named insured.
Q: Is the application important to the issuance of the policy?
A: It is extremely important. This is the document the company relies on when determining the extent of coverage to offer, including limits of liability, deductibles, and prior acts coverage. If it is discovered that an attorney has misrepresented information on the application, the policy will become null and void and no coverage would be afforded in the event of a claim.
What to do next
Keep in mind that Professional Liability only covers the “economic” or financial losses suffered by clients and/or third parties, as opposed to bodily injury (BI) and property damage (PD) claims. This is because the latter two types of loss are typically covered under commercial general liability (CGL) policies, which Paragon Underwriters can also help with.
If you’d like a personalized Professional Liability proposal for you and your business, Paragon Underwriters is here to guide you. Call our office today, or start your quote online in a matter of seconds.