By John Baker
An architect had occasion, for the first time, to call on his errors and omissions insurance policy for coverage. No suit had been filed; the architect's client had not even made a claim. But over a period of months, the architect had grown concerned that some problems he had seen in one of his recent projects could easily turn into a defects claim in which he would be a defendant. The architect had maintained his insurance for many years — certainly he was covered. It would be a relief to have some help.
So the architect notified his insurer — told the adjuster all he knew about what might be wrong and how it might have come to be that way. To his surprise and dismay, the adjuster, misinterpreting some of the information he had just heard, concluded that the architect had known about the claim far earlier and, due to a delay in reporting, therefore fell outside the coverage of his professional liability policy. If the adjuster was right, there would be neither coverage nor defense. Instead of getting a helping hand, the architect would face his worst nightmare.
This story is not unusual. Only the luckiest of professionals never faces the prospect of a claim that he or she has made an error for which he or she may be legally liable. This professional could have avoided some missteps and anxiety had he better understood his relationship with the professional liability insurer.
Insurance policies are contracts. Your insurer protects you because it is legally obligated to do so. Your insurer will not protect you from losses or expenses that are not included under the policy. Coverage is determined by broad provisions that are moderated by numerous exclusions. When a claim is initiated, the insurance adjuster's first obligation — to its insurer — is to determine whether the policy terms create an enforceable duty to cover the loss. This requires the adjuster to review policies and determine whether there is a policy that covers the period in which the claim arose; whether the loss is included in the policy coverage; and whether the policy holder has met the policy requirements for timely notice of the claim. The answers to these questions only, not speculation about exposure to liability or size of the claim, will inform an insurer's decision to trigger coverage.
Professional liability insurance, like other liability insurance, protects the professional from loss by defending and satisfying claims that arise out of damages suffered by others. The insurance covers only claims arising out of professional activities, including advice, services, and documents, but only to the extent that the injury or loss was caused by the professional's negligent act or failure to act. Professional liability insurance policies are usually issued yearly, covering claims that arise during the policy term. If the policy lapses without renewal or replacement, the coverage ends, even if the negligent occurred during the policy period.
Claims-made policies usually require the professional to promptly notify the insurer upon receipt of a claim or demand in the policy period. Often the professional's expectation of a claim or demand is enough to trigger the obligation to notify the insurer. A grace period may extend the reporting window for a month or more past the end of the policy period. Failure to timely report a claim or potential claim in time can be fatal to coverage.
First-time purchasers of errors and omissions insurance may be surprised to find that their insurance covers only errors made and claims triggered within the policy term. This is not enough protection for a practice after the first year of operation. Services provided while a policy is in effect can give rise to a claim long after the policy expires. For this reason, replacement policies or renewals typically extend coverage to include prepolicy activities performed after an earlier threshold date, called the retroactive date. The retroactive date is usually set as the initial date of the first policy, when the professional is continuously insured through a number of policy periods. One may negotiate earlier or later retroactive dates with the insurer to account for firm ownership changes or other factors, which may entail rate adjustments to account for the increase or decrease in risk.
Liability insurance is different from property or accident indemnity insurance. Your property insurance, which may include fire insurance, all-risk insurance or comprehensive insurance, protects against loss of and damage to your own property. Your accident insurance protects you from costs and losses arising out of your own injuries. The insurance adjuster's duty, within the limits of the insurance policy contract, is to provide you with financial resources to recover from your loss. You are the insurer's customer and you receive the policy benefit, by payment to you or on your behalf. The insurer's future sales to you will probably be influenced by how you feel about the service and value you receive in the adjustment process.
Under a liability policy you are being defended, but someone else will receive the benefit of any adjustment. The insurer's motivation is to resolve the claim, whether real or imagined, and reduce or eliminate the threat of liability at the least expense to itself. Neither your satisfaction nor the claimant's satisfaction with the adjustment process or amount figures into the equation.
If you are a professional who believes you need to call on your liability insurance, look at the policy and understand its requirements. Remember, the first step is to establish coverage, not to convince the insurer that you have a good case. Limit the information and background you provide to facts that will inform the adjuster's analysis. If you do not understand or if you disagree with the insurer's response, get independent legal advice.