Financial events have taught us that professional liability insurance is an essential offering in an insurance plan and a major component in any long term business strategy. Many are renewing their insurance programs without fully understanding the policy coverage or how it relates to their changing needs. To help you understand your accountants professional liability policy as well as we do, here are some of the most often misunderstood terms in a professional liability insurance policy.
First Dollar Defense
The standard deductible in Accountants’ Professional Liability Insurance Policies is payable by the Insured when a claim is made and reported to their Insurance Company. The deductible applies towards both legal expenses and damages incurred in resolving a claim. First Dollar Defense changes the deductible feature to only apply towards damages paid with the Insurance Company paying all expenses in the handling of a claim. For instance, if a claim requires only Attorney’s Fees to resolve, the Insured pays nothing and the expenses are paid by the company from the limit of liability. The added cost for this feature is typically 5-10% on your premium.
Deductibles are typically defined as applicable to each claim reported during a policy period. An Aggregate Deductible limits the amount paid by the Insured during the policy period to the deductible amount regardless of the number of claims reported. This feature will cost an additional 5-10% on your premium. Split Limits Accountants’ Professional Liability Insurance Policies include a limit of liability equal to the maximum amount the Insurance Company will pay on all claims reported during the policy period. A policy with a Split Limit provides an aggregate limit that is typically a multiple of the limit of liability. For instance, if you purchase a policy with a $1,000,000 limit of liability, the most the Company will pay for one or multiple claims reported during the policy period is $1,000,000. If you purchase a policy with a split limit, $1,000,000/$2,000,000, the policy will pay up to $1,000,000 on a single claim and $2,000,000 for all claims reported during the policy period.
Expenses Outside the Limit of Liability
The standard Accountants Professional Liability Insurance Policy provides a limit of liability equal to the total amount that the Insurance Company will pay for claims reported during the policy period. These payments include expenses, Attorney Fees to represent you, and damages paid to settle a claim. The option to purchase a policy with Expenses Outside The Limit Of Liability converts the limit to only pay for damages and the company pays for the expenses outside the limit. Typically this feature is capped at the amount of the limit. For example, if you purchase a policy with a $500,000 limit of liability and expenses outside the limit, there is $500,000 available to pay damages for all claims reported during the policy period and expenses are paid by the company in addition to your limit, up to the outside expense limit. The cost-related impact of this extra benefit on your premium will typically range between 5-15%.
Claims Made Policy
Accountants Professional Liability Insurance policies are written on a Claims-Made Basis. In a Claims-Made Policy, coverage is triggered when notice of a claim is realized by the Insured and reported to their Professional Liability carrier. The policy in place at the time the claim is made will respond, regardless of when the act causing the claim occurred, subject to other conditions in the policy.
An important feature of a claims-made policy is the Retroactive Date also referred to as the prior acts date. This date represents the first date the Insured purchased and continuously maintained their professional liability coverage. For example, a policy with a policy period of 1/1/2012-1/1/2013 and a retroactive date of 1/1/2000 will respond to claims made and reported during the policy period based on services provided subsequent to 1/1/2000. It is extremely important to continuously renew your Professional Liability Insurance Policy to avoid a gap in coverage.
Extended Reporting Period
Another important feature to claims-made policies is the Extended Reporting Period option, also referred to as tail coverage.The extended reporting feature is available in the event the Insured discontinues operation due to retirement or selling their practice. The extended reporting feature is available for a premium that is dependent on the length of the reporting period option. This feature provides coverage for claims made and reported based on services provided prior to the end of the last policy, the date you closed or sold your practice, and otherwise covered by that last policy.
Posted by Kyle Nieman
Kyle Nieman, a 25 year veteran of the insurance industry, is President and Chief Executive Officer of Amerinst Professional Services, Ltd. Most recently, Kyle was senior vice president of distribution strategy at CNA where he managed agency/broker relationships and cross-sell strategies. Prior to leading distribution, Kyle was Vice President of Underwriting for CNA’s multiple professional liability portfolios including accountants, attorneys and real estate agents. For over 20 years, Kyle was responsible for underwriting and program management for the AICPA endorsed professional liability program and several state bar programs at CNA and at Crum and Forster where he started his career.