By Rickard Jorgensen, FCII, ARM, ACIArb Each insurer’s policy is arranged differently, and the items listed above can be located in different places and with different headings in each policy. However, by reading the explanations below, you should be able to locate them no matter where they are found within a policy.
1. Coverage Agreements Professional Liability coverage is written on a Claims Made and Reported basis. That is, the claim must be made against the policyholder and reported to the company during the policy term. The insurer has a duty to defend claims. The section contains important limitations to the policy, whereby the insurer will not cover:
- Claims for work preformed before the retroactive date;
- Claims which have already been reported to an insurer; or,
- Claims arising from situations that you were aware of, or should have been aware of, which existed before the policy started.
This section of the policy is sometimes referred to as the “Hammer Clause” and defines who has the right to settle a claim. It states that if the policyholder does not accept the insurer’s recommended settlement, future increases in the cost of the settlement are the responsibility of the policyholder. Sometimes the clause may be modified to allow for 50% or 30% of the future increase (sometimes known as a “modified” hammer clause).. The broadest policies do not include a hammer clause. Other matters covered in this section of the policy include whether the insurer has the right to select defense counsel in the event of a claim. The policy language may explicitly state the right of the insurer to select defense counsel (for example, “Selection of defense counsel will be at the prerogative of the Company”). Alternatively, the right to select defense counsel may be implied in the right to defend a claim (for example, “The Company shall have the right and duty to defend any claim”). The clause may state that the insured has a right to select defense counsel (the opposite of the situation above) but the insurer may have the right to approve the choice of defense counsel. Or the insurer may have the right to revoke the selection; The clause may also state whether the insured’s consent is required to settle a claim. If the insured’s consent is required, the policy may place a limit on what the insurer will pay if the insured refuses to settle (see modified hammer above). The important things to note is this section of the policy dictates who can chose defense counsel and who has the right to make a settlement of any claim.
3. The limit of liability and deductible
Limit: Most professional liability policies are usually written on the basis of Claim Expenses Included within the limit of liability. That means you have a single amount of coverage for both defense expenses and a settlement. Some policies allow for an optional additional, but equal, separate limit of coverage for defense costs. In certain states (e.g. Montana and New York) this basis of coverage – that is, Claims Expenses in Addition to the Limit of Liability – is mandatory under State law. Some policies provide a “claim expense allowance.” This provision, which is still rare, provides an allowance (e.g. $100,000) for claim expenses, in excess of the deductible, and aggregate for all claims. Using this example, this means that after paying the deductible, you would be allowed $100,000 in claim expenses before your limits of liability are drawn down to pay for claim expenses. Deductible: The policy deductible usually applies to each claim (or may be an aggregate per policy period) and can be applied to both the settlement amount and/or the defense expenses. Certain policies permit a deductible that applies to loss (settlement) only. There may be various permutations on how the deductible is applied. In some States, there may be a specific way the deductible operates (e.g. New York mandates the deductible applies to damages only). The deductible can be modified to apply only once during the period of insurance (an aggregate deductible or Self-Insured Retention). This can also be coupled to apply as twice or three times the each loss deductible. Some larger aggregate deductibles may also include a maintenance deductible that would apply to each subsequent claim made after the aggregate deducible has been fully spent.
4. Coverage Extensions
Your policy may include various extra coverage features. These can include additional coverage extension for pre-claims assistance, inquiries by State or Federal regulators, outside directorship positions or event client notification costs in the event of a cyber breach. You should verify that coverage is in addition to the limit of liability and whether or not a deductible applies.
5. Risk Management and Deductible Reduction features
This section of the policy provides for various scenarios where you can cut he amount of the deductible. This might be via the use of an engagements letters for non-attest services, early settlement of a claim or the use of alternative dispute resolution to settle a claim. Some policies allow for deductible reduction in the event you did not notify claims in prior years.
6. Definitions – Covered act, wrongful act or negligent act
This is a very important clause. It determines the basis of coverage. Ideally, the definition should not include the word “negligence” or “negligent”, as the policy should provide coverage for full tort liability coverage, breach of contract, misrepresentation or violation of good faith, or an error or failure to render an opinion or offer a service. Limiting coverage to negligence is a gap in your coverage. Try to ensure the definition of covered acts encompasses “any actual or alleged act, error, omission or Personal Injury” without limitation.
7. Definitions – Professional Services
Of equal importance is the definition of covered activities. Some policies list services covered. The risk with this type of approach is that the list is not all encompassing and may omit one or more services provided by your firm. The safest approach is to secure a broad definition of Professional Services that covers: “services performed or advice given by you to others provided that the remuneration for such services or advice, or a portion thereof, inures to your benefit.” This wide-ranging definition grants comprehensive coverage for all activities performed by your firm.
8. Definitions – other terms
Clauses to look for include:
- Named Insured. The “Named Insured” is usually defined as the partnership, LLC, LLP, a professional corporation, a professional association or individual as stated on the Declaration page. Other accountants covered by the policy are usually considered as part of the definition of the insured. Make sure that you have coverage for everyone who should be covered and for acts on behalf of the firm (Named Insured).
- Predecessor Firms. If the term “predecessor firms” is included in the definitions, coverage applies to any predecessors of the existing firm.
- Who is insured and whether there is coverage for affiliation or network relationships.
- Subsidiaries – any entity in which you have a majority stake and that is performing professional services.
- Damages – does this include punitive or exemplary awards
- Network Security and Privacy coverage – does the policy extend to include cyber liability perils?
Professional Liability for CPAs – Understanding your coverage – Part IV – exclusions
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 firstname.lastname@example.org.