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The Professional Liability Tidbits blog has a new home and a new website. Join us at www.pltidbits.com. If you can't recall the url when you need it, typing the whole thing out will also get you there in a pinch: http://www.professionalliabilitytidbits.com.

Bookmark our new address and please surf by. In 2009 our new site will have expanded content including a white paper archive and other PL-related resources. See you there!

Bankruptcy/Insolvency (11/13 & 11/20 Knowledge Knuggets)

With financial turmoil and uncertainty abounding, now would be a good time to discuss the impact of policy provisions pertaining to bankruptcy and/or insolvency. There are two types of entities who can be affected by these provisions: Your agency, and your clients. Your agency E&O policy most likely has an exclusion that eliminates coverage if a carrier with whom you have placed business becomes insolvent. These exclusions can appear in two forms. One excludes coverage for all claims arising from business placed with any carrier who becomes insolvent. The other excludes coverage for claims arising from an insolvent carrier's inability to pay claims. As you can imagine, the first form is a significantly broader exclusion and can prohibit coverage for claims arising from the simplest error or omission, for example, a failure to process an endorsement, regardless of whether the company's actual insolvency impacted the claims payment at all. There are many carriers who use the more narrow exclusion where coverage is only impaired if the carrier fails to make a payment. In your insured's policies, you will want to make note of the bankruptcy/insolvency provisions that may limit coverage. Many policies specifically state that the carrier's obligation under the policy will not be impaired by the insured's insolvency or bankruptcy. Some carriers are silent on the matter. Others have an exclusion that indicates they will not provide coverage for any claims arising from the insured's bankruptcy or insolvency. Here's a mind-bender for you: If your insured's policy says that the carrier's obligation will not be impaired by the insured's insolvency or bankruptcy, AND there is also a bankruptcy/insolvency exclusion -- what happens to a claim where a wrongful act occurred right as the insured was slipping into insolvency? Which provision will prevail? How will the claim be adjusted? Who gets to determine if the claim "arises from" bankruptcy/insolvency? There are two more things about insolvency/bankruptcy that can be very important to your clients. 1. Change of control -- if your insured is taken over by a bankruptcy court, or even if they are lucky enough to find an Angel investor who buys more than 50% of their shares, it is quite possible that the transaction will eliminate go-forward coverage under their professional liability policies. This includes their E&O, D&O, EPL, and other forms. For most, but not all, of these policies, there is a "change of control" or "transaction" wording that mandates that coverage stop the very day the originally underwritten shareholders or board lose control of the company. The policy continues on, but only as a reporting vehicle. Premium frequently becomes fully earned. This means that wrongful acts occurring *after* the date of the transaction are Not Covered! This is usually the last thing on your insured's mind...but it won't be if they have an uncovered loss. It is usually feasible to write a new go-forward policy, so do not let this gap go unaddressed. 2. Tail, aka Extended Reporting Period. After a transaction, or even if the insured just decides to non-renew coverage as a cost-cutting measure due to threat of insolvency, tail should be offered. Again, it is usually the last thing on the insured's mind. But if you offer it, and they reject it, you at least have a defense when they try to blame you for the uncovered loss that finally drives them over the edge. Note -- there are some policies that offer only a "unilateral" tail. This means that tail is only available if the carrier terminates, cancels, or nonrenews the policy. If you have an insured who is having issues and may need to cancel or nonrenew coverage, do not hesitate to request tail anyway. Sometimes the carriers will make an exception for this type of situation. If the insured wants tail so they can switch carriers to save money, the incumbent is not so disposed to assist. But if there's a genuine emergency, and the insured just cannot continue coverage, some have been known to be flexible. Also, note that if the insured cancels for non-payment of premium or non-reimbursement of a deductible, tail is generally not available.

The Wild and Wooly World of Real Estate (10/16 - 11/6 Knowledge Knuggets)

Knowledge Knuggets for 10/16 - 11/6 have been about real estate classes of business. I previously posted one regarding inspectors and have combined both these topics into one over-arching post regarding real estate exposures and market status. Happy reading:

The Wild and Woolly World of Real Estate.....

Almost every real estate-related profession has seen quite the roller coaster in the last couple of years, and the end is nowhere in sight.

Two of the higher profile classes of business -- mortgage brokers and real estate agents -- are in a state of high turmoil. We have seen consolidations and closures of businesses, and insureds dropping their coverage because they don't anticipate continuing in the field, or cannot produce sufficient business.

The flip side of the coin is on the carrier side, where many, many markets that used to write these lines of business quite readily are no longer in play. There are a few carriers that are still willing and able to write, although they are taking a conservative approach.

The real estate classes of business which you will run into, and which may be more difficult to place are:

Real estate agents and brokers
Mortgage brokers and bankers
Title agents
Escrow companies
Appraisers
Home (and other) Inspectors

In the world of real estate, agents are differentiated from brokers with regard to legal scope and services rendered. Generally speaking coverage is available only for brokers, or for firms with a licensed broker. As a practical matter, this does not pose a problem, because agents need to affiliated with a broker in order to perform services, so you will not (one would hope) ever face a situation where you need to insure an agent who is not working with a broker.

In some states, professional liability coverage is required to meet licensing standards, and in those states, there is frequently an "approved" program. The state-endorsed programs I have reviewed tend to cover only the individual agents and brokers, not the real estate agency (entity) itself. To the extent the agency holds no assets, it may not need protection, as it has "nothing to lose", but unless the owner is willing to fold the entity should a claim be made against it, declare bankruptcy, and open up another agency (all of which might create heartburn with the regulatory bodies) it's a good idea to contemplate a separate or excess policy for the entity.

Be aware that some carriers are very good at insuring pure real estate agents/brokers, but falter when mortgage broking, property management, escrow, or other related services are provided. Carriers' approach to real estate agents conducting transactions on owned properties also varies widely. Most carriers also require a minimum number of years experience (usually three to five) before a new firm will qualify for coverage.

Common causes of loss for real estate agents and brokers include failure to disclose (problems in a property or conflicts of interest such as dual agency), and discrimination. Discrimination is frequently excluded in a typical policy, but it could be picked up by third party coverage on an EPL policy, if the EPL underwriter is willing. Personal injury (libel, slander, etc.) is a good coverage to keep an eye out for, and most real estate professionals have a strong privacy liability exposure which is generally not covered by a typical E&O policy. A privacy liability policy that includes loss of paper documents would be key to address this exposure.

Next on the list is mortgage bankers and brokers.

This is such a rich and complex topic, I could spend two or three weeks, or a book, on just these opportunities and exposures. But I'll spare you for now, and perhaps put together a white paper, which I will later post on the blog. (www.professionalliabilitytidbits.blogspot.com)

First thing to know is that "mortgage banker" and "mortgage broker" are not interchangeable terms. Sometimes it doesn't seem that way, because insureds will say they're a "mortgage company", and they're not specific about what they do. Also, many carriers will say they cover "mortgage brokers/bankers" when in fact they don't provide coverage to mortgage bankers at all, or they do so on a very limited basis.

Here's the basic difference between the two:

A mortgage broker simply originates loans. They work as an intermediary between the lender (or many lenders) and the borrower. Not unlike an insurance agent.

A mortgage banker may originate loans, but most importantly, they actually fund the loans. They can do this with their own funds, or through what's called a "warehouse line of credit" where the money is supplied by investors or other lenders. After they fund enough loans, they resell them, replenish their coffers (or their credit line), and fund more loans.

Both types of entities can service loans (collect payments, manage hazard/tax escrow accounts, etc.), but that is a separate service in which they may or may not engage. More mortgage bankers do at least a little servicing, because they need to manage their loan portfolio until they can sell the loans to the secondary market. They can do the servicing themselves, or they can outsource it.

In many states, mortgage brokers must be licensed. Some states do not have a specific mortgage broking license, and the mortgage broker operates under a real estate agent's or broker's license. Licensing is one way you can tell the difference between a mortgage broker and a mortgage banker. Another way is a look at the company's balance sheet. A mortgage banker will have money somewhere. If you suspect an entity is a mortgage banker, and they don't have money on their balance sheet, the next question is "do you have a warehouse line of credit?"

Major exposures:
• Lack of disclosure of loan terms or fees
• Violations of RESPA (a real estate regulation)
• Discrimination
• Conflicts of interest
• Inappropriate underwriting or submissions

Some, but not all, of these exposures can be covered by E&O policies.

A lot of markets who were writing mortgage brokers have stopped, or are only writing retro inception now. Many who were writing mortgage bankers have stopped. Most markets are excluding subprime loans and have added other exclusions. Since many of your potential insureds have a retroactive pool of subprime activities, beware of this exclusion and try to get subprime coverage at least on the past acts, so you can avoid a gap.

Home (and Other) Inspectors:

There are several types of inspectors for whom E&O can be written. Some -- usually home inspectors -- are required to carry coverage by law in certain jurisdictions.

As a rule of thumb, most carriers want to cover those inspectors that only carry a clipboard, not a toolbox. So if an inspector also offers repair services, he or she becomes virtually uninsurable.

A quick summary of the types of inspectors:

Home Inspectors -- checking for habitability on behalf of the purchaser, generally pre-purchase
Commercial Building Inspectors -- pre-purchase inspections, or construction-completion inspections
Building Code Inspectors -- inspect for code compliance
Environmental Inspectors -- check for mold, radon, clean air, water potability, etc.

Home inspectors are the most common of these, and there are several programs for them, and some association programs. GL is frequently offered in combination with the PL. Contingent BI/PD, or lack of a BI/PD exclusion altogether, is a must for this class, as well as for all inspectors.

Some of the home inspector markets will write commercial building inspectors as well.

Code compliance inspectors are probably the most difficult class to write, but there are a few carriers who will entertain them, and a bare handful that will provide contingent BI/PD.

Environmental Inspectors are easier to write than one might think, but only if you're using the right markets. Most home inspector markets, and indeed most E&O markets, do not have an appetite for the pollution hazard and catastrophic contingent BI/PD exposure presented by environmental inspectors. Environmental markets, however, view this class favorably, and provide broad coverage and attractive pricing.

One thing to note -- the word "environmental" sometimes can refer to matters of industrial hygiene (the "environment" in which the workers perform their tasks). If the insured is involved in inspecting industrial plants and recommending modifications to ergonomics or processes, they are more along the lines of a safety consultant than a true "inspector", although the terms are somewhat interchangeable.

So after exploring real estate agents/brokers, mortgage brokers/bankers, and all manner of inspectors, your might ask "What else is there?"

It just so happens I have an answer for you.

Title agents, escrow agents, appraisers, foreclosure services, mortgage field reps, debt negotiators, property managers, leasing agents, as well as real estate investors and investments.

The first three classes mentioned above have seen an increasingly shrinking marketplace. Used to be they could be written for pennies on the dollar, and had many association programs that offered broad coverages on the cheap. However, with the downturn in the housing marketplace, and homeowners scrambling to find any way they can to hold onto their houses, there are increasing claims against these professionals.

Also, appraisers have been deemed to be in cahoots with real estate agents and mortgage brokers in supporting inflated home values that justified suspect loans, and now they are viewed with quite a bit of distrust by the carriers.

Several carriers have just outright stopped insuring these classes, and others are more closely underwriting and are increasing pricing and retentions.

Mortgage field reps are those people who will go out to a foreclosure property to make sure it's there, take a few pictures from the outside, and report back to the mortgagee. An interesting class without a huge exposure, they are frequently required by the mortgagee to carry coverage. One must be very careful to distinguish them from "home inspectors" because the risk is not at all the same, and only certain niche carriers do a good job with home inspectors, while other carriers altogether can do a good job with field reps.

Debt negotiators are all the rage. They will intervene with lenders on behalf of borrowers (or sometime at the behest of real estate agents or mortgage brokers looking to get some deals done) and facilitate the borrower and lender reaching a mutually beneficial agreement about how a loan can be structured. If the debt negotiator actually goes to the extent of proposing refinancing and/or shopping a refinance deal, they are actually a mortgage broker and must be insured as such.

Property managers and leasing agents haven't seen too much of an upset in this real estate market yet. Perhaps because rental properties are only more valuable and needed in this time where people are having to leave their homes, or where home sales have diminished. Commercial risks are not as easy to insure as residential, for the obvious reason that there is a lot more at stake in each transaction. Tenant discrimination coverage is generally provided separately from E&O. It can be written on the same policy, or in concert with the E&O, but it is a separate underwriting process, separate app or supplemental (or segment of the app).

Real estate investors and investments include all manner of private equity firms, REITs, 1031 exchanges, and any other type of person or firm that purchases, holds, manages, or sells property with investment funds for any reason other than to occupy it themselves. Most of these firms execute deals on behalf of third parties on at least one-half of the transaction (i.e. a third party buyer, or a third party owner), they may be completely arms-length facilitators with both buyer and seller being third parties, or they may be executing transactions for the benefit of investors. This private equity exposure has become more difficult to insure as the profit prospect of this line of investment has become more questionable. However, coverage is still available at a price, especially for insureds who have a track record of success and who provide proper disclosures to investors.

One interesting thing regarding real estate investment-related firms -- the D&O and E&O exposures are frequently indistinguishable and should generally be written together on one policy, or at least with one carrier. You can imagine the difficulty in trying to sort out whether the sale or management of a property gone bad is an affront to the investors as a fiduciary issue of proper caretaking of corporate assets, or whether the investors got rooked into a deal where the so-called professionals couldn't tell La Jolla from a hole in the ground and were incompetent to perform the services of evaluating, buying, managing or selling properties. Does the claim arise from the professional service rendered? Or does it arise from the breach of fiduciary duty as a D or O of the company? Much safer to insure both whenever possible.

Business Risk or Insurable Exposure? (8/14 Knowledge Knugget)

Recently, I've been seeing increasing requests for coverage for activities that would not typically be considered professional services. Of course, with the growth of Miscellaneous E&O/Professional Liability beginning about 10 years ago, the line between "professional", "errors and omissions", and "uninsurable business risk" has become increasingly blurred. Here are some pointers for identifying a potential errors and omissions exposure for which coverage might be available: Can your insured's activity result in financial loss to a third party (your insured's customer, or client of the insured's customer) Is your insured performing a service? Can you think of a way that service can be defined and its potential to cause financial loss anticipated? Can a loss occur due to an error or omission, versus the typical "occurrence" or "accident" that gives rise to a GL claim? Can the service that could result in financial loss be isolated from the core services covered by GL? Can a rating basis be allocated to such service? If you can answer most of the above questions "yes", it's possible there's an insurable "professional" service in your insured's operations. There are some carriers willing to be very creative in this marketplace. Although some are stuck in the "that's a business risk" mentality and will not consider cutting edge coverages, others will rub their chins, put their thinking caps on and come back with "yes, we can do that". Then it's merely a matter of matching up the carrier's desired pricing with the insured's sensitivity to risk. Sometimes insureds are unaware of these exposures or just assume they cannot be covered. Many formerly "uninsurable" business risks are now covered under the common D&O policy with entity coverage. Others can be insured with an appropriate errors and omissions policy. The scope of coverages available is constantly expanding, so don't be afraid to ask about these exposures. Some examples: Picking and packing exposure of a distributor Freight forwarding exposure of a manufacturer that exports their own goods Third party exposure for owned real estate sales or property management Concept artist for playground equipment (not a design professional)

What's in a Name? Part 4 (8/7/08 Knowledge Knugget)

Continuing with our issues regarding DBAs of Insureds....

4. Not only can the inclusion of DBAs in the Named Insured imply that those who are not listed would not be covered, there is also the question of operations conducted outside the DBAs, and in the legal entity's own name. For example, if Acme Corp. does business as Joe's Business Consulting, and Joe takes a large job as Acme Corp., if the declarations page reads "Acme Corp. dba Joe's Business Consulting" is Acme Corp covered for consulting done in its own name? Food for thought.

And you can see the even greater difficulty if Joe's Business Consulting was the Named Insured, Joe performed his services as Acme Corp., and a claim came in against Acme, as we discussed last week.

5. The last issue for this segment is that if the Named Insured is a DBA, there can be all manner of gyrations underneath that level that might never come to your attention, but which can void or compromise coverage. Actual ownership of the underlying entity can change, the entity itself can be bought or sold, but if the DBA is the Named Insured, and it continues its operations and public presentation with no change, the insured(s) may never think to come to you to effect appropriate changes in their policies. If a claim occurs, not only could there be questions raised about continuity and identity of the entity(ies) insured, but policy conditions prohibiting assignment of the policy without carrier consent could come into play to void coverage, and change of control provisions could also have been unwittingly triggered, no tail offered, etc.

There are a few ways to address these issues and pitfalls.

First, make sure you understand how your insured is structured and what their legal names and entities are. Make sure all legal entities are shown on the applications, and on the policies. That will eliminate the situation where the carrier pleads ignorance, never having heard of the underlying entity prior to the claim.

Second, if your insured is concerned about coverage for DBAs, ask them to provide you with a list of all dbas, and refresh that list during your annual account review. Also advise your insured to keep you apprised of any and all changes and additions to DBAs. Take that list, and submit it to your underwriter or wholesaler, and ask them DBAs are handled, and how they want to keep track of them, if they feel they need to. The key question is - does a DBA need to be shown on the policy to trigger coverage if a claim is made against them. (I will survey companies on this matter at some point in the future and share my results.)

Third, if your insured does 100% of their operations under a limited, stable number of DBAs, listing the legal entity and the DBAs on the dec is relatively safe and straightforward, but see concern 4 above.

Carriers are generally more likely to respond to a claim against a DBA if they insure the underlying legal entity, than they are the other way around. So the most important thing to remember is that the underlying legal entity must be named on the policy.

There are more things to discuss regarding names, but we'll take a bit of a break and return to the subject later.

What's in a Name? Part 3 (7/31/08 Knowledge Knugget)

Continuing our quest to find the perfect name for our Insured, let's talk about DBAs.

What is a "DBA"? Generally, a "DBA" is a trade name your insured has registered with state or local agencies, as required, in order to use that name in the public domain. The DBA may or may not have any relationship to the insured's legal name. In some jurisdictions, as long as the trade name has certain things in common with the legal name, it need not be registered.

Many insureds want their DBA listed on their policy. This is understandable, since it's the name the public sees most often, and the insured is concerned that if a claim is made against them, it will be made in the name of the DBA, not the insured's legal name, which may not be readily apparent.

However, having the DBA as the Named Insured is a technical error, and even including them along with the Named Insured can be a slippery slope. Here's why:

1. Most applications and declarations pages in professional liability refer to the insured organization or entity. A DBA is neither an organization, nor an entity; it is merely a name. If the DBA is the *only* item shown on the dec, there can be issues when a claim is made against the legal entity behind the DBA, as this will be the first the underwriters have heard of the legal entity, and they tend to not appreciate the lack of disclosure when the application has previously requested the information. (I have seen a claim declined for this, although eventually, after much proof and hassle, we were able to get the carrier to agree to accept the claim.)

2. As an agent, there are many tricks of the trade you can use to make sure you're getting the right information from your insured. Among the foremost is spotting an inconsistency between the organizational form and the insured's proposed name on the app. If the insured is an LLC, a corporation, partnership or other legal form of organization, there are generally laws requiring that a signifier, like "inc." "corp" or "LLC" be used in their name. If your insured is not a sole proprietor, but you don't see "inc." or some other kind of organizational signifier on their app, ask if the Insured Name provided to you is a dba, and if so, get the legal entity name and use it instead of, or in addition to, the dba. (This is a best practice for all your lines of coverage -- not just professional.)

3. Some insureds "do business as" one name for certain operations of their company, and "do business as" a different name (or perhaps no name other than the actual company's legal name) for other operations. This is not uncommon when there are various operating divisions or diverse income centers in an entity. If you have listed one DBA on the policy, then another pops up and you are not advised about it and therefore it is not added to the policy, is it covered? It may depend on how your claims adjuster feels at the time of loss. And as a practical matter, maintenance of a large schedule of DBA names may not be a cost-effective or prudent use of your time.

Stay tuned for more issues and some solutions next week....

What's in a Name? Part 2 (7/24/08 Knowledge Knugget)

Back to our friends at Acme Corp/Beta Corp and their naming challenges.....

If Acme Corp. had not merely changed its name to Beta Corp. but had actually had a change in ownership, had reincorporated, or had taken on investors who acquired a majority interest in the company, there could be significant interruptions to coverage well beyond what a change of name would entail.

We won't go into those right now (stay tuned for a later Knowledge Knugget about Change of Control), but suffice it to say that any time one of your insureds approaches you with a request to do anything to its name on its insurance policies, you are in a red flag situation (at least as it pertains to their professional liability coverages) and will likely need to pose some additional questions.

Insureds frequently underestimate the impact of their internal or structural changes on their coverages, and they also frequently do not want to divulge all of the particulars to their agent.

That having been said, here are some areas in which your insureds' name(s) can cause challenges:

1. DBAs -- to include or not include is the question
2. Operating divisions or trade names
3. Parent or sister companies
4. Shareholders/owners/partners/LLC members
5. Subsidiaries
6. Additional Insureds
7. Scheduled Insureds
8. Deleting individuals

These areas are in a broad category regarding "Who is an Insured", and we'll explore them over the weeks to come.

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.

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.

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.

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.

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.