Thursday, July 17, 2008

What's in a Name? (7/17/08 Knowledge Knugget)

Because professional liability coverage is established through the definition of professional services, and because the coverage is written predominantly on a claims-made basis, the issue of who is named as insured, and when, can make or break your coverage.

There are several situations in which the naming of the insured and the timing of the name can create challenges.

Here is an example:

Acme Corp. is insured with a policy running January 1, 2006 to January 1, 2007. In
October of 2006, Acme changes its name to Beta Corp. Nothing else changes. The operation remains the same; the ownership remains the same. You would want coverage to continue with no changes.

The agent will usually request the named insured be changed to Beta Corp in this situation. What you really want is to add Beta as an Insured. Here's why:

Although there would be a paper trail of coverage for both Acme and Beta in the '06-'07 policy, what happens when the policy renews January 1, 2007, and the Named Insured on the policy now reads "Beta Corp.," and Acme is nowhere to be found?

If a claim is made and reported on April 1, 2007, and the defendant is Acme Corp., does the policy need to respond?

Technically, unless there is predecessor firm wording in the policy, Acme Corp. is not an insured during the '07-'08 policy period, so a carrier could decline coverage. As a practical matter, if the '07 policy renewed with the same carrier that wrote the '06 policy, they would have a difficult time declining. However, if the '07 carrier is a new one, they have no history with Acme Corp., possibly no knowledge of Acme Corp., and even though they may have provided prior acts coverage on the policy, the defendant is not an Insured.

To avoid this stumbling block, leave the Acme name on the policy. Do not "change" the name. Merely add Beta to the policy.

Stay tuned for more examples and solutions next week.

Thursday, July 10, 2008

Tail Trials and Tribulations - Part 2 (7/10/08 Knowledge Knugget)

So why would it matter if your insured's Extended Reporting Period (ERP) provision was uinlateral or bilateral?

Generally, an insured is not planning on going out of business, being purchased, having claims, or doing anything else that would make continuing with his existing policy undesireable. When any one of these things happens, and your insured needs to change carriers, or discontinue coverage altogether, it's exceedingly important that he have the opportunity to trigger tail with the expiring carrier.

He may not need to, depending on alternative terms available, but if alternative terms are unattractive (lower limits, reduced scope of coverage, higher retention), or if the alternative carrier refuses to provide prior acts coverage, the insured could find himself in a situation where he cannot change carriers without risking a gap in coverage.

This gap arises when a carrier on a unilateral tail policy offers renewal terms that are unfavorable, yet because the policy has not been nonrenewed or cancelled, the unilateral tail provision is not triggered. Or, the insured could cancel the policy mid-term, due to financial concerns, sale of the business, or other needs, or non-renew at the policy expiration, and he then has no ability to preserve reporting capability under the cancelled or expired policy. Again, this is because the *carrier* did not do the cancelling or nonrenewing.

Frequently, the insured may not have been in a position financially to purchase the tail, but you want that to be his decision, not a result of a placement that doesn't allow for tail to be purchased.

Unilateral tails are not the industry standard, but they are definitely on the street. You will want to check policy wording to ensure that the tail offer (Usually under a section entitled "Extended Reporting Period," or "Optional Extended Reporting Period") starts out with "If the Named Insured or the Carrier cancel or nonrenew.....". If the wording starts out with "Should the carrier cancel or nonrenew...." and the Named Insured is not included in that paragraph, you may have trouble brewing.

Thursday, July 3, 2008

The Extended Reporting Period, or -- Tail Trials and Tribulations (7/3/08 Knowledge Knugget)

Most claims-made policies have an extended reporting period (ERP or "tail") provision. This provision allows a pre-set period of time in which an insured can report claims made after the expiration of a policy.

Although the extended reporting provision is a very standard offering in claims-made policies -- even required by law on admitted paper in most jurisdictions -- it is anything but standardized.

If an agent reviews anything about an ERP while evaluating terms, he or she will generally look at the pricing compared to competing terms. i.e., does a 12 month ERP cost 100% of the expiring premium, or 150%, or less.

The cost of an ERP should be the least of the agent's worries. Most anything that is undesireable about an ERP will not be discovered until after it becomes an issue.

One example of this is whether an ERP is offered on a bilateral or unilateral basis. A bilateral tail can be triggered by either the insured or the carrier nonrenewing or cancelling the policy. A unilateral tail can only be triggered if the carrier cancels or nonrenews the policy.

Next week, we'll talk about how this difference can cause unexpected problems.

Critical Coverage Concept - The Hammer Clause (6/26/08 Knowledge Knugget)

Last week we talked about the Consent to Settle clause wherein carriers agree to not settle any claim without the insured's consent.

When the carriers make that provision, they frequently (but not always) qualify it by adding what's called "the hammer clause".

The hammer clause provides that the carrier requires the insured's consent to settle, but if the carrier negotiates a potential settlement that it likes, and the insured does *not* consent......then the insured is responsible for all defense costs thereafter, and if the settlement exceeds the initial negotiated potential settlement, the insured is also responsible for the additional settlement amounts.

As you can imagine, the spectre of having to pay ongoing litigation costs, and the potential of being responsible for hundreds of thousands of dollars of damages has a chilling effect on the insured's desire to continue litigation without the carrier's support.

In this soft market, many carriers are providing what is called a "velvet hammer" or a "softened hammer". This is seen most often in D&O and EPL forms, but can occur in others. A velvet hammer is a compromise where the carrier provides some amount of defense and/or indemnity after the insured refuses a recommended settlement offer. The carrier's participation usually is around 70% to 80% of continuing defense and eventual settlement costs, and the provision requires that the insured bear the remaining amount itself (no insurance allowed!).

If the market continues to soften, we can expect to see this provision eek into other classes of business as well.

Some carriers provide additional motivation for the insured to accept the first settlement proposal. This motivation generally comes in the form of a reduction of the deductible, sometimes up to 50%.

Critical Coverage Concept - Consent to Settle (6/19/08 Knowledge Knugget)

  • Most professional liability policies contain what is known as a "consent to settle" clause. This coverage provision extends to the Insured control of the settlement of a claim. The insuror may negotiate a potential settlement, but cannot settle without the Insured's agreement.
  • This provision arises from recognition of the potential reputational harm that can be done to a professional by virtue of a carrier settling a claim, thereby imputing liability where none may have existed.
  • This reputational harm can have a negative impact on the professional's ability to earn a living, and can also be a magnet for additional claims. Carriers are very cognizant of this slippery slope and endeavor to avoid it by seeking the insured's agreement to any proposed settlement.
  • In policies where the carrier does not assume the duty to defend, there is generally no consent to settle provision, as the carrier does not take control of the settlement negotiations. There are just a handful of exceptions to this rule.
  • I have heard some people opine that the consent to settle provision is mere window dressing. After all, GL policies do not provide such an enhancement to their insureds. True, but GL claims do not speak to the reputation of the professional, do they? In any situation where all other things are equal, I would definitely prefer to provide the consent to settle to our insured, rather than underestimate its importance. Certainly, the decision to forego such an enhancement should be made by the insured. Not by his or her broker

Critical Coverage Concept - Defense in Addition (6/12/08 Knowledge Knugget)

You may have noticed by now that most professional liability policies lump defense expenses and damages payments into a single policy limit.

This has historically been the case for most lines of professional liability because the vast majority of costs associated with professional liability claims are the defense expenses.

In this soft market, and in some lines, we are now seeing "defense in addition" to the limits being granted.

Here, we must exercise caution.

Unlike GL, when a professional liability carrier talks about "defense in addition", they rarely mean unlimited defense. Many carriers actually limit the defense in addition to the same limit purchased for liability, or a maximum of 1mm.

For example, if your insured purchased a 500,000 limit of liability with a "defense in addition" carrier, the defense is generally limited to 500,000. If the insured purchased a 2mm limit, the defense could well be capped at 1mm.

There are just a few companies that will provide *true* defense outside the limits. They set defense expenses completely outside the limit wording of the policy, and with those companies the defense works very much as it does in GL. Combined with the insured retaining control over settlement, this coverage packs quite a positive punch.

Generally, if an insured must pay for additional capped limits of defense, it is prudent to at least consider increasing the entire limit instead. Doing so tends to cost just a tiny bit more, and it ensures that limits are available for whatever need presents itself.