IJ Exclusive: Shand Morahan’s ‘How to Write’ Professional Liability

In the ongoing “How to Write” broadcast series from the Insurance Journal studios in San Diego, Calif., Carol Murphy and Mary Sanders of Shand Morahan & Co. discussed errors and omissions insurance, professional liability coverage for the claims that result in economic damages resulting from acts, and errors or omissions arising from professional services performed for others for a fee.

“We are not talking about professionals that are doctors, CPAs, lawyers or architects. Those folks all have specific courses they have taken or exams they have passed to prove their proficiency. These are the other miscellaneous professionals who by virtue of their skills and abilities perform services for other people,” Sanders said.

This kind of insurance may be appropriate for anyone who gives advice, makes educated recommendations, designs solutions or recommends the means of others. Some examples might be consultants, software designers, placement services or even insurance agents and brokers.

“These are all nonstandard, so you won’t find an ISO form for miscellaneous professional,” Sanders said. “Basically what we are looking at are the risks to a professional of liability, claims or losses. These can arise from two different sources primarily, contractually based action or negligence based action”

Contractually based action arises with the contract being breeched by the professional and the plaintiff suffering some kind of economic damage with a proximate causation between the breech and the damages.

Negligence is another element, but rather than a contractual agreement existing, a duty exists by virtue of the professional nature of the services that are being provided. Another element would be a breech in the obligation or duty with damages suffered by a plaintiff with a close, causal connection or proximate causation between the act, error or omission and the damages.

“Claims departments are thinking about these elements every time a claim comes in,” Sanders said. “But as producers and underwriters we have to keep these things in mind too. What kind of claims could they be, how big could they be? How large are those damages going to be?”

In looking at what a policy needs to address, Sanders said, “We need to have a policy that addresses allegations of financial loss. In miscellaneous E&O we find that financial losses can arise from acts, errors, omissions or negligence in the performance of professional services. That is if someone fails to do the service at all or does the service but insufficiently. Claims could arise from personal injury, omission, libel, slander or defamation as a result of performance of a professional service.”

This prompts the question, what is the difference between a policy that says it covers negligent acts verses one that says it cover errors and omissions? In miscellaneous E&O, Saunders said she sees that the line between negligence and contractual matters is somewhat muddy.

Murphy stated, “It really comes down to somebody either taking an action, a wrong action, or failing to act at all.”

The definition of professional services will be standard to the profession or unique to a specific applicant, which allows for carving the coverage around what is required for a specific miscellaneous professional liability exposure.

Sanders explained, “Basically, have a couple of possibilities on the professional services side on the way the coverage is triggered. Some miscellaneous E&O policies are written on a straight claims-made basis. Some are written on a straight claims-made and reported basis. The claims-made and reported basis will give a specific timeline during which the claim must be reported to the company, where a strait claims-made policy will typically use the term ‘as soon as practicable.’ Quite often the determination of compliance with that provision is whether there has been prejudice to the company. A claims-made policy would be a little bit broader, but for most types of miscellaneous E&O accounts, this difference isn’t significant. For larger insureds it might be more appropriately handled on strait claims-made because the recording element of getting it up to the management level might be a little more difficult. But with a claims-made and reported policy there usually is a 60-day window, a pretty good amount of time.”

She suggested avoiding shorter timelines than 60 days. “It’s difficult to get that kind of a notice to a company on a short timeline.”

With claims-made, there are two timelines that one needs to track when monitoring coverage or considering coverage according to Sanders. “There is the timeline during which the acts, errors, omissions or personal injuries took place, starting with the retroactive date and ending at the end of the policy period. The other is the claims timeline, which starts at the inception of the policy and runs to the expiration of the policy, unless a tail extension period or an ERP is purchased. Then the tail will extend the claims reporting timeline but it won’t extend the acts timeline. It’s important to keep in mind that two policies with different retroactive dates are not equal. Similarly, if somebody who is looking to get out of business is purchasing a policy, they might want to be considering closely what the optional extension period options are in a policy and what types of tail coverage’s they might be able to purchase.”

Both of those are essential to the claims-made coverage trigger. Also essential is a circumstance reporting provision. This can be called incident sensitive feature or discovery clause, or sometimes it is included in the definition of claims first made. She said it is important because it gives an insured freedom to move allowing an insured to report an incident or circumstance likely to result in a claim to the company and to trigger coverage.

Shand’s position on honoring a prior retroactive date on a new piece of business is to take into consideration prior coverage maintained by a professional.

Definitions

When defining the insured, Murphy explained, “We are going to pick up the entity that is shown on the declaration. What will sometimes happen is the applicant will come in saying they are ‘Jane Doe,’ but then signs the application ‘Jane Doe and Associates.’ We need to be sure that we are covering all the entities that are providing these professional services.”

The definition of insured also extends to include directors, officers, and employees while acting within the scope of their duties on behalf of the named insured. Predecessors may not be covered unless they are named, so it’s not like occurrence forms where a company used to be called the ‘ABC Company’ and now they are called the ‘XYZ Company.’ If one wants coverage for the ‘ABC Company’ they’ll need to get that included in the named insured on their policy. And in the instance of independent contractors, they may not be covered unless they are endorsed.

Claims are another important definition. “Some policies require that a claim be a law suit. Some require it be a written demand. Some require it to be a demand for money or services. Different policies have slightly different angles and it is important to keep this in mind particularly when you are moving from one company to another. But it also determines how you are going to be compliant with the claims-made and reported provisions,” Sanders said.

Murphy defined claims-made expenses. “Typically claims expenses are the expenses incurred for the defense of the insured and will usually be outlined in the company’s selection of defense counsel. Most E&O policies are written on this basis except for very large accounts and the reason is the defense is really a significant segment of the coverage.”

Another important definition is the definition of damages. “Damages are typically defined as compensation for loss and normally excludes any number of things right in the definition. Typically money paid to the insured for services or goods is not included. So if for example, somebody sues the insured just to get their money back, the insured is obligated to pay that money back, not the insurance company. That is a fairly standard provision. It may also exclude fines, penalties and punitive damages as well. Quite often these are not coverags afforded on small miscellaneous E&O accounts, but you might find them on large accounts,” Sanders said.

According to Sanders, the definition of territory will also be in the policy usually addressing the timelines with some kind of provision of where the acts, errors, or omissions take place, and some kind of provision of where the claim is made.

Classes

There is a huge scope of classes that are involved in miscellaneous E&O. Murphy said, “I was reading something the other day that stated there could be as many as 150 different categories. But there certainly are some common themes of classes that we look at.”

One example of a common class of business in miscellaneous E&O that Shand Morahan looks at is property related services.

“In this area we would look at real estate agents, appraisers, property managers and title and escrow agents-basically all the services arising in the scheme of property changing hands. This allows us to take a look at trends.”

Some of the biggest claims that Sanders and Murphy said they see in real estate are primarily related to disclosure not being made at the time of a real estate transaction. With property managers, the type of thing they see is the manager failing to properly maintain the property resulting in the dilution of the value of the property.

Another class they look at is computer related services. “There is a wide variety of these services and it’s growing every day,” Sanders said. “Many people think outsourced data processors are not exactly the thing of the present, but there are still outsourced data processing risks. Failure to retain data or inaccuracy in calculations relating to the data could be claims we might have.”

Software developers are a type of accounts that are looked at in this category Sanders said. “Software developer’s exposures are tied to the applications they are developing. When we see people who are developing software for banks for example there is a very different exposure than software being developed for games. Although, we used to think games were the light end of the deal, now a failure to make a deadline on a Christmas game could be a big deal as well.”

Sanders concluded by saying, “This is a growing segment of the world. The service sector and small business sector are growing in number and the litigious-nature of our society is growing as well. Although suits by individuals have dropped, suits by businesses have not dropped and are continuing to increase. That presents opportunities to everyone in the industry to grow premium volume.”

Topics Claims Property Professional Liability