The Agreement: The structure of the agreement for professional liability insurance usually takes one of two forms. In an “indemnify” approach, the client will need to settle the costs of a claim and seek reimbursement by their insurer after the fact. This approach can place a significant financial burden on most businesses depending on the size of a claim. A “pay on behalf of” approach is preferred as the insurer will pay the cost of the claim without reimbursement provisions.
Retroactive Date vs. Full Prior Acts Coverage: It’s very important when purchasing professional liability insurance to make sure your new policy includes full prior acts coverage, if available. This essentially means that for a claim to be covered, the claim had to have occurred after the retroactive date (assuming the current policy is still active). If a claim occurred prior to the retroactive date and there are no “full prior acts” provisions in place, no coverage would be provided. “Full prior acts”, implies coverage is provided back to the retroactive date of a prior E&O policy, and is preferred.
Claims Made or Occurrence Form: The majority of E&O insurance policies are written on a “claims-made” basis, rather than an “occurrence” policy form. The reasons for this are many, with decreased cost of claims-made policies being an important consideration. As with all claims-made policies, it is very important to consider tail coverage and retroactive dates when purchasing this type of professional liability.
The Definition of Insured: The definition of “insured” is an important part of an E&O policy. Your policy may or may not include as insured’s the following: boards of directors, prior employees, independent contractors, as well as temporary or leased staff. Try to obtain coverage for as many of these employee’s as possible.
Punitive and Exemplary Damages: E&O claim settlements can be very high in some instances. A policy that covers punitive and exemplary damages provides an additional layer of coverage for catastrophic claims.
Coverage that Includes Legal Defense Costs: Professional liability insurance will have a provision that will include legal defense costs “within the policy limits” or “in addition to the policy limits”. A policy that includes legal defense costs within policy limits may have the total amount of coverage available to pay a claim greatly reduced depending on the cost of attorney’s fees. In contrast, a policy with coverage’s “in addition to policy limits” will retain the full policy limits for a claims payout, and will not be diluted by the costs of attorney fees.
Exclusions: It’s important to note that every errors & omissions insurance policy contains exclusions and it’s critical to make sure you are covered for the most critical exposures facing your business. An insurance advisor with Schaedler Insurance can help evaluate the most common and costly claims for your industry and make sure your professional liability includes coverage for these risks.
Extended Reporting Period (Tail Coverage): The extended reporting period, also known as tail coverage, is a provision found on most claims-made E&O policies that provides coverage for an extended period of time after a policy has cancelled, assuming the claim occurred within the policy period. Tail coverage, while not a standard feature on all E&O insurance, is often provided for a year, with some policies providing extended periods up to 10 years or longer.