Professional liability insurance safeguards your business. It is specifically beneficial to those who operate their own business, provide medical or dental services or provide other high-level professional service. It is also known as E & O (errors and omissions) insurance. This coverage helps to minimize the costs associated with claims made against your organization or you personally regarding the service, advice, consultation or other expert information you’ve provided. From IT workers to business consultants, it pays to have this coverage in place.
We recently came across the below article that not only explains the importance of Professional Liability Insurance, but suggests best practices as well.
by: Michael Downey and Paige Tungate
“After dealing with an upset client or realizing a mistake was made, lawyers often ask, “Should I tell my insurer?” Usually this leads to concerns about making a problem worse or facing increasing professional liability insurance premiums. Procrastination and worry take over, leading to inaction.
This response – or non-response – is generally unfortunate. Often the better choice is to give notice to the insurer. This column explains why, and how to give notice.
Professional liability insurance is “claims made” insurance. Most people are familiar with “occurrence” coverage, because most homeowner, automotive, and other insurance are occurrence policies. Occurrence coverage is triggered when the act or omission giving rise to the claim occurs. Thus, if you have a car accident in 2016, and you have automotive insurance at the time of the accident, you have coverage for the accident – even if you first learn of a claim in 2017, after you have stopped paying for insurance.
Professional liability policies – including lawyers’ professional liability insurance policies – provide “claims-made” coverage. If a lawyer commits malpractice in 2016 (for example, not suing a correct party or missing a filing deadline), but does not learn about the claim until 2017, the key focus will be whether the lawyer had insurance at the time the claim was made (in 2017) and not when the malpractice occurred. A lawyer who had insurance in 2016 but then learned of a claim in 2017, after dropping insurance, would be “bare” or lack coverage.
For claims made policies, the key date is the date when a claim is first made against the insured or the date the insured first becomes aware of facts or circumstances that might reasonably be expected to be the basis of a claim. Claims-made policies define what a “claim” is. Normally the definition focuses on learning of or receiving communications about potential malpractice liability. Courts then often supplement the policy language defining a claim with a “reasonableness” standard to determine whether the lawyer should know of a claim: “not whether or not the plaintiffs actually committed malpractice, or whether they subjectively believe there was no conduct which could give rise to a claim, but whether a reasonable attorney would have expected a malpractice claim under circumstances.”
Also, malpractice insurance policies require the insured to notify the insurer (a) during the policy period and (b) within a certain amount of time after learning about a claim. The notice also needs to be given during the policy period. Sometimes the policy language requires notice “as soon as practicable.” Courts have defined “as soon as practicable” to mean “prompt and reasonable under the circumstances.”
Lawyers can learn of potential claims in many ways. A lawyer can become informed of events that might give rise to an eventual claim in many ways. You might discover an error on your own, or you might receive a complaint or lawsuit from a client. Contrary to what many lawyers believe, the best rule is better to be safe (and report) than to be sorry. So when in doubt, a report ordinarily should be made.
Complaints from clients can vary in tone and severity. While a little grumbling is normal, significant criticisms – particularly when accompanied by a demand for the client’s file and disgorgement of substantial attorney fees – should probably be reported to the broker. Again, the broker will help evaluate whether a claim has been made, and help provide notice to the insurer.
Why report such potential claims? It may seem like a hassle or overkill to report any instance where you think you made a mistake that might materially impact a client, or any instance when a client’s complaints seem more significant than ordinary grumbling. This is actually smart practice.
The reporting of such a pre-claim – often referred to as a “circumstance” – attaches that incident to the professional liability policy then in place. Thus, if you learn about a potential claim in 2016, and give notice to your insurer at that time, the claim will be covered even if the actual lawsuit or demand is not filed until 2017, even if your professional liability policy has expired by 2017. Meanwhile, if it turns out what you knew in 2016 did constitute a “claim,” your failure to report it at that time might prevent you from having insurance coverage due to the delay in reporting.
Also, such early notice may give you access to resources that your insurer can provide to help prevent the circumstance from growing into an actual claim. Insurers can often help remedy a situation before it requires litigation or an expensive settlement. This helps everyone keep the costs down.
Legal malpractice insurers appreciate insureds who are on top of their business and trying to head off potential claims before those claims grow into expensive problems. Everyone in the lawyers’ professional liability world recognizes that sometimes mistakes occur, or that sometimes clients get angry, for good or bad reasons. Insurers recognize that quick action often heads off bigger and more expensive problems. Also, a law firm that is aware of and seeks guidance on its problems can adopt corrective measures before similar circumstances are repeated. The insurance company’s sole job is to assist its insureds, whether that assistance involves defending or resolving claims, or by utilizing other resources to avoid liability.
Therefore, in my experience, prompt reporting of pre-claim circumstances almost never results in an increase in insurance premiums or denial of renewal, at least when the firm generally operates in a safe manner and is attentive to reducing malpractice liability risks.
Provide notice when renewing. Law firms are asked on the application to list any circumstances that may give rise to liability when seeking to renew their professional liability insurance. The law firm should be careful to gather all available information on potential claims, and to report those circumstances directly to the carrier for the existing policy (to attach those claims to the policy the firm has already purchased) and on the renewal application. The old insurer will only cover reported claims, and the new insurer will generally refuse to cover claims the firm should have identified during a prior policy period. Failure to report a circumstance or claim might therefore create a gap in coverage, where neither insurer is willing to cover a claim.
The basics of notice.
What is required to provide notice? Policies may include specific requirements, but normally a short, plain writing (often an email) that states the identity of the client, the lawyers handling the file, and the situation that may result in the claim should suffice to give notice to an insurer. Normally the firm provides this information to broker or risk management counsel, who reviews the notice and insures it provides an adequate description of the relevant circumstances.
There are many pros and often zero cons to providing prompt notice of claims and potential claims to your professional liability insurer. Once you provide notice, you will likely then only need to keep them informed of any changes in the situation. This is far less painful and annoying than learning that you had purchased professional liability insurance, but still are going to be uncovered on a claim because you did not report the claim in a timely manner.”
This article was prepared by Michael Downey and Paige Tungate. Michael Downey is the founder of Downey Law Group, LLC., a St. Louis law firm devoted to legal ethics and the law of lawyering. He has also taught legal ethics and law firm practice at Washington University and St. Louis University, and testified as an expert on legal ethics and law practice matters in Missouri, Illinois, Kansas, Oklahoma, Pennsylvania, and the District of Columbia.
Paige is also a lawyer at Downey Law Group, LLC. (She was admitted in September 2015).