How to Switch Your Professional Liability Insurance Without Losing Coverage
Be careful when switching your professional liability insurance policy. There can be dangers if you don’t know what to watch out for. It is important to identify changes in your coverage that could limit your protection. Here are some key things to understand and look for when considering switching your professional liability insurance to help you avoid any loss in coverage.
Ensure your firm retroactive date matches [exactly]
Your retroactive date is the start date from which you are protected from past acts (subject to the terms and conditions of the policy). This date is critical. Most lawyers’ professional liability insurance is written on a claims-made and reported policy form. This means a claim is only covered if the claim is made against the insured and reported to the carrier during the policy period and occurred after the retroactive date. Because of that, your retroactive date is essential to the protection of your practice.
We have seen cases where a firm had an August 13th retroactive date. Then they switched to another agent and had an August 14th retroactive date. That is one day of coverage lost due to a misunderstanding of information. Imagine if years of coverage had been lost instead of just one day! We’ve seen this as well.
Even if it is a loss of coverage for just one day, there are reasons this is not acceptable. If a firm was sued for professional liability based upon an act, error or omission for services performed on August 13th, there would be no coverage. This was the result of switching agents/carriers just one time. Imagine this happening over the course of your career. You could easily lose weeks by not safeguarding your original retroactive date. Often when a firm seeks coverage with another agent for “a better price” it may be because the new agent did not match the firm’s current retroactive date. If the difference in premium appears too good to be true, it is often due to a reduction in coverage.
Review the endorsements to be attached to your policy
Due to the complexity of professional liability insurance, it needs a method of customization. If an insured has a specific need the standard policy does not fulfill, the carrier will use an endorsement. An endorsement is used to make an alteration to the policy by adding or subtracting coverage. In short, endorsements are mechanisms that allow carriers to customize for each individual need.
An endorsement overrides anything that needs to be changed from the standard policy form. Some endorsements are mandatory and required by the state the policy is written in. Most endorsements are optional and will be applied at the request of the insured.
There are also exclusionary endorsements. For example, if you have a prior claim, the carrier may add an exclusionary endorsement to reduce the carrier’s exposure. Expect most carriers to add similar endorsements for prior claims. We don’t recommend hiding prior claims. You don’t want to give the carrier a reason to decline a claim due to the failure to disclose.
When reviewing competitive quotes, carefully compare the exclusionary endorsements. That is one way of making a policy appear cheaper when in fact it’s providing less coverage.
Coverage enhancing endorsements can be used to strengthen your coverage. One example is an ‘Additional Claims Expenses’ endorsement. It endorses the policy to provide additional limits for claims expenses. Not being aware the firm currently has this coverage will impact the estimate you receive from other companies. If it is not carried forward on a proposed new policy, there will be a reduction in premium, and along with that, a reduction in coverage.
Some other examples of coverage enhancing endorsements are:
- Loss Only Deductible (the deductible does not apply to claims expenses; only a monetary judgement or settlement)
- Aggregate Deductible (caps the amount of the deductible for the policy year in the event of multiple claims)
- Defense costs in addition to the limits of liability (as described above)
- Coverage for punitive damages (available in certain states)
If your current policy carries coverage enhancing endorsements, make sure you review any new proposed policy to ensure these endorsements are part of the new proposed policy.
Read the exclusions in the policy form
Each policy is different when it comes to exclusions. Make sure you read and fully understand each of the policy exclusions in your policy. Agents should provide a specimen of the policy when you are first quoted so you can review any exclusions that have been included.
Cost is often a decision driver. However, you can cost-reduce until you don’t have the coverage you need. What you thought was saving you money could in turn cost you a great deal more. Understanding the policy exclusions is important so you don’t give up critical coverage. By taking pause to review the policy exclusions, you can avoid a painful discovery down the road.
Extended Reporting Period Options (AKA ‘Tail’ Coverage)
An Extended Reporting Period (also known as “tail coverage”) provides the insured an additional period of time to report a claim after their policy has expired. You either need to renew your policy each year, or exercise an Extended Reporting Period (ERP) option in order to maintain coverage for past legal services with a claims-made and reported policy.
ERPs can be available for individuals in a firm, or to the firm as a whole. Some policies only offer an ERP up to 3 years. Others offer an unlimited option. Many carriers offer a free Unlimited ERP upon retirement after being continuously insured with them for a minimum number of years. This makes your years of paying premiums an investment.
There are many differences when it comes to ERPs. No matter what your age is or how close you are to retirement, understanding the benefits of the ERP under your existing policy is essential. There may be a difference that is not worth the savings today.
Another key consideration with regards to ERPs is the carrier’s strength, solvency and longevity in the market. A Free Unlimited ERP is worthless with a defunct carrier.
Wrapping up
Protect the integrity of your coverage by providing your current policy in its entirety (claims history, loss runs, accurate application information, etc). Know what coverages you have if you are shopping different policies. This can help protect you from the potential cost of losing coverage altogether. Caveat Emptor!
* Examples used in this blog are compressed and reconstructed to avoid any specifications in an effort to protect privacy. Information in this article is based on general principles of professional liability insurance and is intended for information purposes only. It is not offered for the purpose of providing individualized advice.
