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this page Third Party Civil Liability – The Ins and Outs of Professional Liability Insurance In the last issue of Field Notes mention was made of the risk posed to Qualified Persons as a result of Third Party Civil Liability. Although the following article was written for a professional engineering audience it provides a useful background on the terms and nomenclature used by the insurance industry. APGO has not vetted the contents however believes it provides a useful introduction to professional liability insurance. Permission was kindly granted to reprint the following article first published in Innovation, journal of the Association of Professional Engineers and Geoscientists of BC, September/October 2005 issue article. 46547 Sept/Oct 05 Innovation Professional Indemnity Insurance Lawrence Bicknell Persons or organizations who render professional services may become legally liable if they fail to use the due care and degree of skill expected of a person in their profession. Insurance for this exposure is known variously, and not consistently, as “professional liability” insurance, “professional indemnity” insurance, “malpractice” insurance and “errors and omissions” insurance. Here we will focus on the basic principles behind professional liability insurance for design consultants. Two Approaches for Coverage In order to determine coverage when writing liability insurance, insurers use two widely differing approaches. The difference centres upon the event that triggers coverage, which is known as the “coverage trigger.” The two types of forms are known as “claims-made” and “occurrence” based policies. A review of your present liability insurance program will reveal both-claims made and occurrence policy forms. Commercial general liability insurance is written on an occurrence basis. Professional liability insurance will use the claims-made coverage trigger, as will other coverage such as employee benefits liability and directors and officers insurance. The occurrence policy’s coverage trigger is tied to the date of the event or accident giving rise to the claim. Under an occurrence policy, the policy in force on the date of the event causing the loss must respond to provide both a defense and indemnity. The claim may arise years after the policy has expired. In the case of a claims-made policy, coverage is triggered by the date you first became aware and notified the insurer of a claim or potential claim. The insurer’s policy in force on the date you became aware and gave notice is the insurer who must defend and settle the claim. Claims-Made Policy Triggers Four conditions trigger a claims-made policy:
Variations in Claims-Made Coverage The most limited type of claims-made policy covers only claims that are made against the insured and reported under the policy during the policy period, and that arise from errors, omissions or negligent acts that occur during the policy period. This type of limited claims-made policy is very unsatisfactory because it does not cover claims made during the current policy period that arise from errors, omissions or negligent acts that occur prior to the policy period. In addition, it does not provide coverage for potential problems that have not developed into a more formal claim. To overcome these problems there are a number of variations and extensions — some of which appear in many, but not all, claims-made policies. These variations fall into four categories: Retroactive Extensions — These extensions are designed to pick up claims first made during the current policy period that arise from errors, omissions and negligent acts occurring prior to the policy period. Some policies have a limited retroactive extension by inserting a “retroactive limitation date,” which is often the date when insurance was first placed. An alternative is to define the retroactive date as the date when the insured first started to practise. Better still is full retroactive coverage with no reference to a date. Lock In/Circumstance Extensions — These extensions permit insureds to report an incident or circumstance that may reasonably result in a claim in the future. If the policy does not have this extension, then the policy would not be triggered in a situation where an insured knows of a potential problem that has not yet materialized into a formal claim against the insured. Reporting Extensions — Policies normally require all claims to be reported during the policy period. If the claim is made against the insured late in the policy period, or if a claim has been filed but not yet served, the insured may not be in compliance with the policy reporting requirements. The solution is an extension, which provides a short period following cancellation or expiry, during which an insured can report claims that were made during the policy period that would not otherwise be reported due to lack to time. Discovery Extensions — This group of extensions is needed to provide coverage following the termination of an individual policy or a program or following retirement, dissolution and other business changes. The policy only insures past work and provides coverage for claims first made during the discovery period. Typically a discovery policy is arranged for a one, two or three year period. Other Coverage Considerations Who is Insured? Negligent Acts Professional Services Policy Territory Losses Damages The policy often defines “damages” by stating what is not covered. A good example is “the return of fees or charges for services rendered or expenses incurred by the INSURED for redesign, changes, additions or remedies necessitated by a CLAIM.” It is worth reading the definition to fully understand the extent of your coverage. Claims Expenses/Defense Costs Deductible/Self-Insured Retention Duty to Defend vs Non-Duty to Defend Conclusion Lawrence Bicknell is Senior Vice President of Jardine Lloyd Thompson, which specializes in professional liability insurance and construction insurance and bonds. He can be reached at (604) 640-4263 or lbicknell@jltcanada.com. |
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