Insurance Glossary

An admitted carrier is one that is approved to operate within a state by the state insurance commissioner (thus admitted into the state).

Conversely, a non-admitted insurer, also known as an excess and surplus (E&S) lines carrier, is an insurance company that is allowed to do business in a state but is not required to have its rates and policies approved by the state’s regulatory body. Because of this, non-admitted insurers are not subject to the same state insurance regulations as admitted insurers and their regulations are usually less strict.

Although an admitted carrier is approved to operate by the state insurance commissioner, it’s important to understand that basing the quality of a carrier solely on its admitted status is inadvisable. A carrier’s rating and financial strength are crucial when considering the quality of an insurance carrier.

A carrier’s Financial Strength is a reflection of its financial health and likelihood to meet its financial obligations.

It’s important to weigh a carrier’s rating and financial strength when considering the purchase of a policy.

A Guarantee Fund is an organization created by state law to protect policyholders in the event that an insurer becomes insolvent.

The fund is maintained by the state’s insurance commissioner and governed by an elected board of directors. If an insurer is declared insolvent by the state, the Guarantee Fund pays claims up to a specified dollar amount.

Only admitted carriers are backed by the Guarantee Fund, whereas non-admitted carriers are not.

An Insurance Rating is a score assigned by rating agencies to indicate the financial strength of an insurance company.

A carrier with a weak financial status has a higher likelihood of becoming insolvent. If a carrier becomes insolvent, policyholders must rely on the state’s Guarantee Fund to pay for claims. Insolvency can also result in the inability to exercise an Extended Reporting Period (ERP) option.

When purchasing a policy, it’s important to consider the carrier’s rating and financial strength, especially before purchasing or exercising an Extended Reporting Period (ERP) option.

A Non-admitted Insurance Carrier is not licensed to operate in a particular state and is not regulated by that state’s insurance department as strictly as an admitted carrier.

Brokers or agents utilize such insurance companies to cover hard-to-insure risks that are unable to obtain standard insurance coverage. Many states require brokers to conduct a diligent search and complete an affidavit verifying they made an effort to place the insured in the admitted market.

Non-Admitted carriers are subject to Surplus Lines Taxes, Fees, and Filings.

Lawyers Re-Entering the Admitted Market After Placement in the Non-Admitted (Surplus Lines) Market

A Risk Retention Group (RRG) is a liability insurance company that allows businesses with similar insurance needs to pool their risks and form an insurance company.

RRs are created under the federal Liability Risk Retention Act and must be formed as liability insurance companies under the laws of at least one state. RRGs can have either state or federal charters. A federal charter allows the RRG to write liability coverage in any state where it is registered without having to become a licensed carrier in each state.

A Stamping Fee is a charge for services performed by the Surplus Lines Association (SLA), which is assessed for each declaration page, cover note, or other premium-bearing documents submitted to the SLA.

The fee is collected from the insured, in addition to the premium, and paid to the applicable state’s Surplus Lines Association.

All new and renewal policies and endorsements for Surplus Lines placement (non-admitted carriers) must be ‘filed’ with the Surplus Lines Association (SLA). This usually includes a copy of the Declarations Page, Binder, and Invoice. Some states also require specific forms to be completed and included in the filing.

The SLA reviews these documents for completeness and accuracy in accordance with the Insurance Commissioner’s instructions. The filing is then coded and recorded in the SLA database. If there are any errors, inaccuracies, or problems in the filed documents, the Surplus Lines Broker is notified (tagging). If the violation is not resolved in a specified amount of time, it is reported to the Commissioner, and the broker/agent could be fined if the error is not remediated.

A Surplus Lines Tax is charged on all surplus line insurance transactions (policies placed with non-admitted carriers).

The tax is collected from the insured, in addition to the premium, and paid to the appropriate state.

An Aggregate Deductible limits the total amount the insured pays for deductible expenses to a specified amount, regardless of the number of claims reported during the policy period.

This coverage benefit is typically added by a policy endorsement.

For example, if an insured has a $5,000 aggregate deductible and two claims occur during a single policy period, the insured only pays up to the $5,000 deductible once.

Career Prior Acts Coverage provides coverage for all insured acts, errors, or omissions with no retroactive date on the policy.

For example, Career Prior Acts could protect an insured for all acts back to when the attorney passed the Bar.

This is usually only available to firms that have been continuously insured for as long as they have been practicing.

Claim expenses and defense costs will erode the limit of liability, leaving only the remaining amount available to pay for any judgments and settlements.

Once the policy limits are exhausted, any further costs must be paid out-of-pocket by the insured.

For example, if a policy has a $500,000 per claim limit, this amount covers both defense and indemnity costs. If it takes $600,000 to defend and settle the claim, the insured is responsible for the additional $100,000.

Calculating Adequate Coverage When It Comes to Limits of Liability

Claims Expenses Outside the Limits (CEOL) provides a separate limit of liability specifically for defense costs and other claim expenses. This ensures that the primary policy limits will not be eroded solely due to these costs.

Once the CEOL limits are exhausted, any further defense costs must be paid out-of-pocket by the insured.

This coverage benefit is usually added by a policy endorsement.

For example, a $500,000 per claim policy that has a CEOL Endorsement attached may have an additional $500,000 limit for defense costs.

Calculating Adequate Coverage When It Comes to Limits of Liability

Claims Expenses Partially Outside the Limits (PCEOL) provides a separate limit of liability specifically for defense costs and other claim expenses, typically half of the per-claim limit of liability. As a result, the primary policy limits will not be eroded because of defense costs and other claim expenses.

Once the limits are exhausted, further defense costs must be paid out-of-pocket by the insured.

This coverage benefit is added by a policy endorsement.

For example, a $500,000 per claim policy that has a CEOL Endorsement attached will have an additional $250,000 limit for defense costs.

Calculating Adequate Coverage When It Comes to Limits of Liability

A policy written on a “claims-made and reported” basis is designed to cover claims made and reported during the policy period. Coverage must be in force not only when a claim is reported but also when the alleged act, error, or omission that results in a claim occurred.

Lawyers Professional Liability Insurance policies are typically written on a claims-made and reported policy form.

A claims-made policy requires coverage to be in place at the time a claim is reported, and the incident must occur after the retroactive date.

A claims-made and reported policy requires that you report any claim or potential claim during the policy period in which you received notice of the claim.

If a claim is made after the policy expires or is canceled, it will not be covered unless an extended reporting period (tail coverage) is purchased.

The Differences Between Claims-Made and Occurrence Policies

Defense costs are expenses incurred to defend lawsuits or claims. These costs can include legal fees, court costs, or expert witness fees.

The definition of Defense Costs will vary between carriers. It’s important to review the policy definition.

However defined, defense costs can quickly add up and exhaust the limits of liability.

The Effective Date is the first day the current policy is in force.

The Effective and Expiration Dates of a policy will be 12 months apart, creating an anniversary date for future renewals.

An excess policy is a secondary policy that is triggered once the primary insurance policy’s limits of liability have been exhausted.

When an insured’s primary carrier is unwilling to offer the limits needed or desired for the firm, an excess policy can be purchased in order to meet limit requirements or needs.

The Expiration Date, or “Ex-Date”, is the last day the current policy is effective. Coverage ends at 12:01 am on this date.

If a 12-month policy is renewed without a lapse in coverage, the Effective Date of the renewal policy will be the same month and date as the prior policy’s Expiration Date.

The Extended Reporting Period (ERP), often referred to as “Tail Coverage”, is an endorsement applied to the existing policy to extend the time for which claims can be reported under the policy. This endorsement provides coverage for claims made after the policy expires or is no longer in force, as long as the covered acts, errors, or omissions occurred while the policy was in force.

An ERP endorsement does not provide any coverage for future acts. Failure to purchase an ERP option will result in no coverage should a claim arise in the future for professional services rendered while the policy was in force.

Generally, an insured has the right to purchase this coverage when a policy is not renewed or, in some cases, when it is canceled. Options typically range from 12-month ERPs to “Unlimited”. There are circumstances where an ERP will not be available for purchase, depending on the policy. Refer to the policy language regarding the availability of an ERP.

Extended Reporting Period options are usually not renewable. Once the ERP expires, coverage for past acts ceases.

This benefit differs between carriers. There are differences in options, availability, restrictions, and prices.

It is important to carefully review the policy prior to purchase.

Indemnity costs are costs paid to another party as compensation for damages or losses. These costs erode the limits of liability.

The definition of Indemnity Costs may vary between carriers. It’s important to review the policy for definitions, policy triggers, and payouts.

Per Claim Limit

The per claim limit is the maximum amount the insurer will pay for a single claim.

Aggregate Limit

The aggregate limit is the maximum amount the insurer will pay for all claims during the policy period.

For example, if the policy has “$500,000 per claim / $1,000,000 aggregate”, two claims costing $500,000 each will exhaust both the per claim limit and the limits for the policy period. Even if there is only one claim during the policy period, the insurer will not pay more than $500,000 for that claim.

Calculating Adequate Coverage When It Comes to Limits of Liability

The Loss & Expense (L&E) deductible is the amount the insured is responsible for when a claim is made, covering both defense costs and indemnity expenses that start to accrue.

The Loss Only Deductible, also known as the First Dollar Defense (FDD) Deductible, means the deductible does not apply to defense costs. The insured is only responsible for the deductible if indemnity losses are accrued.

This coverage benefit is added by a policy endorsement.

For example, if an insured has a $5,000 loss only deductible and only defense costs are paid for a claim, the insured does not have to pay the deductible. However, if the claim pays any indemnity amount, that amount, up to the $5,000 deductible would be due.

The Named Insured is the listed owner of an insurance policy. The person or entity is listed on the Declarations Page of the policy.

It’s important to understand how a carrier defines “Named Insured” and “Insured”, as these definitions impact when the policy coverage is triggered.

Some policies are written “on behalf of the Named Insured”, meaning a claim or potential claim cannot trigger coverage unless the legal services rendered were on behalf of the Named Insured. If the services were provided by another entity, coverage may not apply. With these policy forms, it’s crucial to update entity names and provide predecessor firm details to the carrier.

Review the policy definitions of “Insured” and “Named Insured” and assess how the policy is trigged before purchase.

A Non-Practicing Extended Reporting Period (ERP), also known as a “Retirement Tail”, is an endorsement that extends the time for which claims can be reported under a policy. However, this endorsement can only be exercised upon retirement or the cessation of practice.

Many carriers offer an Unlimited Non-Practicing ERP at no additional cost after an insured has been continuously insured by the carrier for a certain number of years.

A Non-Practicing ERP Endorsement does not provide any coverage for any future acts. Some carriers may void the ERP if an insured returns to the practice of law.

The Non-Practicing Extended Reporting Period is not renewable. Once the limits of liability have been exhausted and the tail expires, or the endorsement is voided, there is no coverage whatsoever should a claim arise in the future.

This benefit differs between carriers and is not available with all carriers. If available, there are differences in options, restrictions, and eligibility requirements.

Review the policy carefully prior to purchase and consider your retirement plans.

An occurrence policy provides coverage for claims arising from incidents that took place while coverage was in force, regardless of when the claims are reported.

An occurrence policy does not require retroactive date(s) and extended reporting period options like a claims-made and reporting policy does.

The Differences Between Claims-Made and Occurrence Policies

The policy period is the span of time between the inception and expiration date of the policy.

This timeframe determines when coverage is in effect and is typically found on the Declarations Page.

A Predecessor Firm is an entity to which the insured is the majority successor in the interest of financial assets and liabilities of a firm or professional legal corporation engaged in the practice of law.

Some carriers include Predecessor Firm in their definition of “Insured”. However, other carriers may require detailed information on the Predecessor Firm(s) in order to list them specifically on the policy, otherwise there would be no coverage.

Always review the policy and definitions carefully prior to purchase.

The premium is the amount paid for an insurance policy.

For Lawyers Professional Liability Insurance, policies are typically issued for a 12-month period, making the premiums an annual cost.

The Prior Acts Coverage Date is a specific date, prior to which there is no coverage for the insured’s acts, errors, or omissions of the insured.

This date usually coincides with the effective date of the original claims-made policy the insured purchased and remains the same for future policies if there is uninterrupted continuous coverage in place.

Prior Acts Coverage 101

The retroactive (retro) date is the date after which losses may occur and be covered under a claims-made policy. Claims arising from incidents that occur before this date are not covered.

As long as continuous coverage is maintained, the retroactive date should not change. It is important to confirm the date matches the prior policy at renewal, especially when switching carriers or agents.

The retro-inception date is when the Prior Acts or Retroactive Date matches the policy inception date. This typically applies when a new policy is issued without prior acts coverage.

Prior Acts Coverage 101

Unlike other ERP Options, an “Unlimited” Extended Reporting Period does not have an expiration date but rather expires once the limits of liability have been exhausted.

An ERP Endorsement does not provide any coverage for any future acts.

This benefit differs between carriers and is not available with all carriers. There are differences in options, availability, restrictions, and prices.

Review the policy prior to purchase.

A Certificate of Insurance, also known as a COI, is a document that proves the existence of an insurance policy and summarizes key aspects.

The issuance of a COI for Lawyers Liability Insurance requires a “Certificate Holder”. The certificate will list the person or entity requesting verification of insurance coverage. The Certificate Holder does not have coverage under the policy nor authority to make changes or requests to the carrier.

While the Declarations Page can also be used as proof of coverage, the COI offers a verification date that may be later than the policy’s effective date, confirming coverage is still in force. The COI also does not list policy premiums, which is beneficial when this information is preferred to be kept private.

This document is issued by a carrier and states basic yet pertinent information about the policy, coverage, and insured.  Also known as a “cover page” on some types of policies.

A Declarations Page is also used as proof of coverage.

Key Questions to Ask When Shopping for Professional Liability Insurance

An endorsement amends the terms of the policy.

Endorsements are used to tailor the policy form to suit the needs of the insured and/or the risk accepted by the carrier.

Some endorsements can add coverage, and some can remove coverage. Review all endorsements being attached to a policy before accepting an insurance offer.

An Exclusion is a policy provision that excludes coverage for a specific loss or risk.

A common exclusionary endorsement removes coverage for any acts that took place prior to the Retroactive Date. Other examples of exclusionary endorsements are Specific Area of Practice Exclusions, Specific Entity Exclusions, and Sublimit Endorsements that set a lower limit to claims involving a specific area of practice or entity.

Review all the exclusions within the policy form and any added exclusionary endorsements prior to accepting an insurance offer.

Professional Liability Insurance, or E&O Insurance, is a type of insurance coverage specifically designed for professionals. It protects a professional or entity against claims and lawsuits filed against them by clients for acts, errors, or omissions.

Price vs. Value: Making Informed Choices When Shopping for Lawyers Professional Liability Insurance

The ‘Step-Rate Factor’ is a formula used to determine a premium that includes a charge for the prior acts coverage provided.

When you initially obtain coverage, the premium reflects one year of coverage. With each renewal, the prior acts coverage period lengthens by a year (an additional year of coverage for work performed back to the retroactive date) which increases the claims exposure. To account for this increased exposure, the carrier will charge a higher premium.

These “steps” in premium will continue each year and eventually “mature”. Depending on the carrier, prior acts coverage can take anywhere from six to eight years from the retroactive date to “mature”.

Once the prior acts are considered “mature”, the charge for prior acts will remain static. At that point, changes in premium should only occur due to claims, changes in the areas of practice, other law practice changes (including location), policy changes, changes in the insurance market, and/or rate increases filed and approved by the carrier.

Underwriting is the process of evaluating an applicant’s risk and their eligibility for insurance with a specific carrier.

A carrier’s “appetite” refers to the types and levels of risk they are willing to write.

This crucial concept helps insurance carriers define boundaries, ensuring the risks accepted align with their business strategy and financial goals.

Key Questions to Ask When Shopping for Professional Liability Insurance

It’s important to review the policy being considered or purchased in detail because each has a different policy form, and their definitions and exclusions differ.

The following terms are some key definitions that can greatly impact coverage:

• Claim
• Claim Expenses
• Damages
• Potential Claim
• Legal Services
• Named Insured
• Insured
• Predecessor Firm
• Exclusions

Reviewing these terms as the carrier defines them can help avoid the mistake of purchasing inadequate or incorrect coverage.

Key Questions to Ask When Shopping for Professional Liability Insurance