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Professional Liability for CPAs Understanding your coverage – Part II – the declarations page

confused-woman-using-laptopBy Rickard Jorgensen, FCII, ARM, ACIArb

The Declarations Page

The declarations page summarizes the coverage in an easy to read one or two page document.  It comprises:

The preamble:

Usually this is a statement about the basis of coverage which reiterates the wording that appears on the application and in the preamble of the policy.  An example of this would be:

NOTICE:  EXCEPT AS MAY BE OTHERWISE PROVIDED HEREIN, THE COVERAGE OF THIS POLICY IS LIMITED TO LIABILITY FOR COVERED ACTS COMMITTED SUBSEQUENT TO THE RETROACTIVE DATE, IF APPLICABLE, FOR WHICH CLAIMS ARE FIRST MADE AGAINST YOU WHILE THE POLICY IS IN FORCE AND WHICH ARE REPORTED TO US NO LATER THAN SIXTY (60) DAYS AFTER THE TERMINATION OF THIS POLICY.  THE COVERAGE OF THIS POLICY DOES NOT APPLY TO CLAIMS FIRST MADE AGAINST YOU AFTER THE TERMINATION OF THIS POLICY UNLESS, AND IN SUCH EVENT ONLY TO THE EXTENT, AN EXTENDED REPORTING PERIOD OPTION APPLIES.

As stated in the posting Part 1 – the application, most professional liability policies are written as “Claims Made” contracts.  That is, the policy will provide protection to you for a claim made against you during the term of the policy.   Certain declarations page will add the words: “REPORTED TO US NO LATER THAN SIXTY (60) DAYS AFTER THE TERMINATION” to reflect the availability of an extended reporting period.

Security details:

This contains information and the name and address of the insurer, the assigned policy number and any prior policy number if this is a renewal of coverage.

Details of the firm insured:

Name, address and mailing address of the policyholder (the Insured firm).  The First Named Insured is defined in the policy and is the primary covered party.

Important Dates:

The states the policy period (usually 12 months commencing at 12.01 a.m. on the “inception” i.e. start date of coverage) and the retroactive date.  The retroactive date is a limitation of coverage which caps the insurer’s risk to services performed AFTER this date.  That means that any claims made which arise from services performed before this date are not covered.  If the declaration page states “Full Prior Acts” or “N/A” then no limitation applies.  Please note, there may be an endorsement to the policy which modifies the retroactive date (see endorsements below).

Amount of coverage:

This is usually described as “Limit of Liability” and is an each loss/per claim amount and an aggregate amount (that is the total amount of coverage available during the policy period.  In most claims, Defense Expenses (that is lawyers’ fees)  are included in the amount of total coverage.

In certain instances, Defense Expenses may be in addition to the Limit of liability.  This is usually for an equal amount to the Limit of Liability, but in can be a lesser amount or in very rare situations, unlimited.

Amount of retained risk (aka Deductible or Self-Insured retention)

The deductible is the amount of out of pocket expenses an insured pays before the insurer makes any defense expense or settlement payments.  Usually, the amount of the deductible applies to both lawyers’ fees and a settlement.

An option may be available where the deductible applies to settlement (loss) only – this means that any defense costs (lawyers’ fees) are not subject to a deductible.

Premium:

This is usually the annual cost of the coverage but may also include an amount for taxes and fees, dependent upon the State where the insured is located.

Endorsements:

These are listed on the declarations page and can be either:

  • State Amendatory endorsements and notices – as required by the insured’s home state.
  • Coverage enhancements – including removal of exclusions, reworking of definitions and specific additional insured endorsements.
  • Exclusions and limitations to coverage.

Signature:

This is the signature of the officer or agent empowered to issue the policy.

When you receive your policy from your insurer you should carefully check the declarations page against the binder and your coverage request.  Although the declarations page is a summary of the coverage and ultimately, you should read the whole policy, a quick review of the various items listed above will give you a comfort that you got what you paid for.

Next time>>>>

Understanding your coverage – Part III – the coverage grant

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com.

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