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.