Incident Sensitivity, Part 2 (3/20/08 Knowledge Knugget)

Why is Incident Sensitivity important?

• If a claims-made policy is incident sensitive, or has a discovery provision, the insured may report to the carrier an error, a wrongful act, a circumstance, or an incident that it believes is likely to develop into a claim.
• The claim trigger in a professional liability policy is usually a demand for damages. In the absence of a demand for damages, coverage cannot be triggered.
• An insured could have a threatening letter from a disgruntled customer, a notice of intent to sue, a subpoena for information, or just a sick feeling in their gut when they realize an error has occurred that is likely to arise in a claim. However, until the demand for damages is actually made, whether in a demand letter or a suit, there is no claim.
• In the absence of the ability to report a circumstance, an insured can know it will have a claim made against it in the future, and can be unable to move coverage when needed because it cannot ensure the future claim will have a home. New carriers will exclude the circumstance as a known wrongful act, or a circumstance which could reasonably be believed to give rise to a claim. The expiring carrier would not respond to the circumstance because it is not a claim, and would not respond to the future claim, because the policy would no longer be in force.

Can an extended reporting period solve this problem? Tune in to next week's Knowledge Knugget to find out.

Incident Sensitivity, Part 3 (3/27/08 Knowledge Knugget)

Can an Extended Reporting Period make up for not having incident sensitivity?

When we left our hapless insured, they knew they would likely have a claim in the future, and wanted to change to a new carrier, but could not put their current carrier on notice of the circumstance due to the lack of incident sensitivity. The new carrier wouldn't pick up the circumstance because it was *known* to the insured as a circumstance that would likely result in a claim. Can the purchase of an extended reporting period allow the insured to move to the new carrier and still sleep at night?

• If the claim develops within the right time period, (within the ERP) the carrier would respond to it.
• However, many carriers offer limited ERPs. Some are as short as 90 days. One, two or three years are the usual periods offered. A handful of markets will offer 6 or 10 year ERPs.
• A detriment to purchasing the ERP is that the insured has now also limited his reporting period and coverage for all unknown previous acts that might give rise to a claim.

The take-away? Unless absolutely necessary, avoid policies that do not allow the reporting of circumstances, incidents, or wrongful acts the insured believes may arise in a claim. This reporting capability is very much needed and it is extremely hard to work around its absence and preserve needed coverage.

Perils of P&P Lit - (4/3/08 Knowledge Knugget)

What is P&P Lit?

P&P stands for "Pending or Prior". Lit stands for "Litigation".

Almost all claims-made professional liability policies have an exclusion for P&P Lit in them somewhere. It can be found in the insuring agreement, or in the qualification of what constitutes a claim, but is most commonly found in the Exclusions section of the policy.

P&P Lit is any litigation filed against an insured, or any litigation that is going to be filed against an insured. Seems fair, right? A new carrier does not want to be responsible for defending any claims that have already been filed against the insured or that are in progress.

Danger zone 1: A plaintiff can file a suit but not immediately serve the insured. This is known as a "blind lawsuit". The insured cannot report the claim, because he doesn't know about it. The current carrier cannot assume defense, because the claim has not been reported. The new carrier will not assume defense because the litigation was already in progress, even though the insured had not yet been served.

Danger zone 2: The "Interrelated Wrongful Acts" definition can take the general subject matter of existing litigation and tie it to what would otherwise appear to be a new demand. That relationship will subject the new demand to the P&P Lit exclusion. The exclusion itself sometimes casts a wide net and picks up related acts or subject matter.

Tech Talk - 1st Party Exposures, Part 1 (4/10/08 Knowledge Knugget)

You may have heard of identity theft and "cyberliability" and recognize that they are areas of concern for your clients -- especially those that are web-based or technology-dependent.

These third party exposures are not the only ones facing your techie insureds. There are additional First Party exposures you will want to consider.

These exposures include many types of attacks on systems that render your insured's technology unable to perform its core functions. Your insured's business basically cannot continue in the absence of the systems, or it is seriously hampered in its performance.

Some insureds rely upon backup tapes or hot sites in case of disaster -- whether physical or technological. However, data restoration can be flawed, and hot sites are quite expensive.

A proper first party technology policy will defray extra expenses and provide business interruption coverage for claims arising from covered perils.

Learn about those perils in next week's Knowledge Knugget.

Tech Talk - 1st Party Exposures, Part 2 (4/17/08 Knowledge Knugget)

Is direct physical loss the biggest threat to your web- or technology-dependent clients? You have probably written a property policy for your client, and may have added Electronic Data Processing (EDP) coverage. Will this take care of those things most likely to put your insured out of business?

One of the most important things an EDP form does is confirm that data is insurable property. EDP policies add coverages such as mechanical breakdown, brownout, and data reconstruction to your client's property coverages.

Neither a property policy nor an EDP policy or endorsement are likely to cover:

• Corruption of data due to a hacker
• Introduction of a virus that disables your client's system
• Overloading of your client's bandwidth or email such that it can no longer function
• Employee tampering or human error
• Cyber-attack on your client's business partners that affects your client's operations
  

Tune in next week to see how first party technology/cyberliability policies are addressing these exposures.

(Again, we are focused here only on first party exposures, so the damages that can be done to third parties and the resultant liability are topics for another day.)

Critical Coverage Concept -- The Professional Services Definition (5/29/08 Knowledge Knugget)

Unlike GL, where a loss must arise from "your work" -- which is whatever you do, and sometimes restricted to the class codes listed on the dec page, sometimes not -- almost all professional liability policies rely upon a definition of professional services to formulate the boundaries of coverage. More often than you would imagine, an insured's professional services, and the definition in the policy upon which he is relying for coverage do not match up. Sometimes the definitions are imbedded in the policy wording, such as for architects and engineers, some insurance agents E&O forms, medical malpractice forms, etc. However, in the world of technology liability and miscellaneous professional, one will most frequently find the definition of professional services provided on the declarations page or by endorsement. Differences can be subtle, or they can be broad. Take, for example, the incident of an insured who had a medical billing service and also did credentialing services for those medical offices for which she did billing. Her professional liability policy definition of professional services said "medical billing service" and made no mention at all of the credentialing services. If a claim arose from her credentialing service (which is *not* incidental to medical billing -- more about that later), would the carrier have any obligation to defend or pay a claim? Some would argue that the definition on the dec is only a rating basis, as one finds in GL. But -- and this is a BIG BUT! -- the GL policy does not (unendorsed) refer back to that "class code" to define coverage, and the professional liability policy does! Review this paraphrased typical language, then go check some of your own policies and see what you think: "We cover the insured for claims arising from Wrongful Acts." Wrongful Acts are then defined as "any act, error or omission in the rendering of or failure to render Professional Serivces." Then Professional Services are defined (I didn't say this would be straightforward) as -- "...services rendered to others for a fee solely in the conduct of the Insured's profession as stated in Item X of the declarations page." Think about our medical billing lady. Any credentialing coverage there? We'll talk about activities that are "incidental to" the defined services next week.

Unintended Consequences -- Or Ooops! What did that exclusion just do to my insured? (5/22/08 Knowledge Knugget)

....and speaking of fiduciary liability..... What happens if your professional liability policy excludes claims arising from plans or activities subject to ERISA, and your insured is a third party administrator, payroll administrator, management consultant, human resources consultant....and their work necessarily touches on those same plans and impacts the administration of same? The ERISA exclusion in a professional liability may be so broad as to negate desired coverage for your insured's activities. For example, it may exclude claims "...arising out of...any responsibility or obligation in connection with any employee or benefit plan....". Could this exclusion apply to your insured's "responsibility or obligation" to perform services in administering clients' plans? Or, it could exclude "...any of Your acts related to any pension, healthcare, welfare, profit sharing, mutual or investment plans....." Pretty broad, right? Maybe too broad for your insured's safety and intended scope of coverage? Preferred wording will exclude *only* the insured's fiduciary duty under ERISA, or will exclude only their involvement in their *own* plans, not those of clients. This can be accomplished by a narrow exclusion, or by a carveback to the exclusion for claims arising from the insured's professional services. (In the rare case that your insured is actually acting as a fiduciary and has been written on a normal professional liability policy, even more modification is needed.) The ERISA exclusion wording varies widely from policy to policy. Read it carefully and ask for appropriate modifications if you have the least little concern that it is too broad for your insured. Chances are the underwriters are not really trying to throw the baby out with the bathwater. They just haven't ready their policy recently with your insured's operations in mind. More "Ooops!" moments to follow in future Knowledge Knuggets. Be sure to put in your request if you've seen exclusions that trouble you.

Does My Insured Need Fiduciary Liability? (5/15/08 Knowledge Knugget)

Does your insured need fiduciary liability coverage? Quite possibly. Fiduciary liability coverage protects fiduciaries (those individuals in a company who bear *personal* liability for the caretaking of employee welfare and benefit plans and the funds that drive them) from financial disaster. An ERISA Bond is not the same as fiduciary liability coverage. An ERISA bond is required to secure plan assets against dishonest acts. The bond comes in to play if there is an act of dishonesty -- absconding with the funds and a co-worker and heading for the Bahamas, let's say. Fiduciary liability is more like professional liability coverage for the management members or owners who are responsible for establishing, authorizing, and/or overseeing the plans. This includes health insurance and any other plans subject to ERISA. Even if your insured has outsourced day-to-day management of plans to a third party vendor, the individual fiduciaries cannot relieve themselves of their personal liability as fiduciaries. Therefore, they still need the coverage at least to fund their defense. Recent events in the stock market and other investment vehicles (think sub-prime and bond rating disasters!) have made the likelihood of fiduciary liability claims much higher. This coverage is very inexpensive, and is available both on a monoline basis, and as part of a D&O or Management Liability placement. It generally has a $0 deductible, and underwriting is quick and easy, if the insured has filed their Form 5500s such that they are available on line.

Contingent Bodily Injury/Property Damage Part 2 (5/8/08 Knowledge Knugget)

How can a professional liability policy cover contingent BI/PD? Keep in mind that the following examples do not apply to design professional or healthcare liability policies, where the risks have a direct exposure, and the policies address it accordingly. 1. A policy may have no BI/PD exclusion. This is rare and does not actually extend coverage. The carrier may still put forth an argument about the BI/PD having arisen from the rendering of or failure to render professional services, since the damage would not be a direct result of the services, but rather an outgrowth of a third party's use of or reliance upon those services. 2. A policy may have a BI/PD exclusion with narrow wording. A typical exclusion applies to claims "arising from, related to, or in any way connected with bodily injury or property damage....". This wording can be used to exclude coverage for any claim where bodily injury or property damage is at the root of the harm. A narrower exclusion that says the policy does not apply to claims "...for bodily injury or property damage..." is generally understood to apply to direct infliction of harm, leaving the door open for contingent claims. 3. A policy may have a BI/PD exclusion with a carveback for claims arising from the delivery of professional services. Wording such as "....however, this exclusion does not apply to claims arising from...." This is a pretty straightforward solution and is just about the best you can get. 4. An affirmative coverage grant would be the best possible way to address this exposure. It is not common. With an affirmative coverage grant, BI/PD could be included in the definition of Wrongful Act. We do frequently see "Personal Injury" included in the definition of Wrongful Act for some classes of business, such as real estate or insurance agents. Think through this example: A software developer creates a program that operates a robot on an assembly line. The robot goes haywire and starts knocking parts off the conveyor belt, and thrashing around, destroying equipment. Which exclusion or coverage clause would you prefer? Check the blog in the next couple of weeks for more detailed explanations and thoughts beyond the scope of the Knowledge Knuggets.

Contingent Bodily Injury/Property Damage Part 1 (5/1/08 Knowledge Knugget)

What is "contingent bodily injury/property damage" coverage? And why do you care?

General Liability policies cover bodily injury or property damage arising from the insured's operations or products. They also generally exlude claims arising from professional services, thereby limiting coverage for a professional to premises liability.

Professional Liability policies cover claims for damages made against the insured by a third party arising from a Wrongful Act. The Wrongful Act is generally an error, act or omission in the rendering of or failure to render professional services.

For most classes of professional liability coverage (Architects and Engineers, and Medical Malpractice being the notable exceptions), there is some kind of exclusion regarding claims arising from bodily injury or property damage.

What happens if your insured is a home inspector, and he fails to notice a leak in the roof? The leak goes undetected until the ceiling collapses. Could he be liable for the collapse? Would his GL policy respond?

If we want the home inspector to have coverage for property damage that occurs due to his negligence, we need to make sure that his professional liability policy provides contingent bodily injury/property damage coverage.

The "contingent" part of that phrase refers to the BI/PD arising *as a result of* his professional services. They are not a result of his direct actions. They are a result of others relying upon his expertise.

More examples and detail to follow next week......

Tech Talk - 1st Party Exposures, Part 3 (4/24/08 Knowledge Knugget)

How are first party technology/cyberliability policies addressing your clients' exposures?

There are many markets offering monoline first party policies, and even more offering first party coverage as part of a combo policy covering both first and third party exposures.

These policies cover many non-physical and some physical causes of loss, provide extra expense and business interruption coverage, and other bells and whistles. Perils and coverages vary widely. A quick run-down of possibilities:

Perils covered include:

• Computer virus
• Unauthorized access
• Employee mistake or tampering
• Internal/External hack attacks
• Denial of service attacks (such as flooding bandwidth)
• Loss to customers or vendors that impacts your client's business
• Cyber-extortion
• Natural disaster
• Power surge
• Theft/physical damage

Types of loss covered:

• Business interruption
• Extra expense
• Forensic expense
• Data recovery cost
• Public relations cost