Friday, June 6, 2008

Professional Services Definition, Part 2 (6/5/08 Knowledge Knugget)

Last week we were talking about the professional services definition, and how omission of a core activity of your insured in that definition can lead to a coverage gap.

How do you know what *must* be shown in the definition? There's no easy answer to this question.

In a perfect world, all activities of the insured would be accurately and fully described. Yet insureds embark on slightly different, but very much related, activities on a daily basis, and neglect to inform their agents. (say it isn't so!!)

So a broader, more all-encompassing description is generally preferred.

Let's think about a definition of "mortgage broker" on a policy. What professional activities would that necessarily include? Loan originations, surely. Loan servicing, sometimes. Making representations to borrowers and to carriers, and shopping loans. All of these activities are "incidental" to the world of mortgage broking, and do not need to be specifically listed.

What is "incidental" is generally established by custom. Would real estate sales be "incidental" to a "mortgage broker" definition? Probably not, even though in many states, mortgage brokers must have a real estate license. So if your insured did mortgage broking *and* real estate sales, you would want both activities listed on the declarations page or definition of professional services.

Here's another example for you: Insurance agents frequently perform risk management or insurance consulting services. Sometimes their policies specifically list those activities as covered, but even if the policy did not specifically state those activities, no one would be surprised to find an insurance agent doing them, and they would be considered "incidental". However, if one was insured as a "risk management consultant" on a policy, would the sale of insurance be considered incidental? Probably not. Risk management consultants frequently are not licensed as agents (depending on jurisdiction), and a full-time risk management consultant rarely actually executes the insurance placement, although he or she may work with an agent to get the placement done.

The key here is to look at your insured's scope of services in terms of the big picture, then ask your underwriter for confirmation that anything unique, specific, or out of the ordinary is considered by him or her to be "incidental" to the core definition, and if not, get it added to the definition.

And make sure your insured reads and understands at least that part of his or her policy. Sometimes they feel it's the underwriter's responsibility to go to their website and check out what they do, and they assume that everything an underwriter could know about is covered. That would not be the case. So even if your insureds don't understand anything else about their policy, they should understand the scope of services that is covered, and give you the thumbs-up that their business is adequately described.

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