Also known as malpractice, or errors & omissions insurance, professional liability policies come in many varieties but most share certain key characteristics:
CLAIMS MADE or OCCURRENCE
CLAIMS MADE policies respond to claims that occur and are reported after the policy retroactive date while the policy remains in-force. Claims that occur during the policy period but are not reported until after the policy is terminated are not covered UNLESS:
- A replacement policy with a retroactive date that supersedes the date of the occurrence that caused a claim is in place, or
- An extended reporting period endorsement, a.k.a. “tail” is in place.
In the first few years, each time a claims-made policy is renewed, the premium increases in order to consider the increased likelihood of claims. A claims-made policy offers coverage on a year-to-year basis.
A retroactive date, a.k.a. prior acts date is the date after which incidents that result in claims may be covered. One’s retroactive date is often the same as the date when one obtains their first professional liability insurance policy, however this is not always the case.
An extended reporting period endorsement or “tail” provides coverage for incidents that occur while a policy is in effect but are not reported until after the policy is terminated. When canceling one policy in order to switch to another, the need for a tail may often be avoided by obtaining prior acts coverage, a strategy through which one may transfer a retroactive date from one policy to another.
Retirement, disability, and death are typical triggers for obtaining a “tail”. In the event that an insurance company terminates a policy holder, it may also be necessary to obtain an extended reporting period endorsement.
OCCURRENCE coverage provides coverage for an injury or damage which takes place during the policy period, regardless of when the claim is reported. An occurrence policy provides insurance for any covered claim that may arise at any time in the future, up to the limits of the policy in force at the time of the incident that led to the claim.
Occurrence coverage is typically more expensive than claims made coverage, particularly in the initial years of a policy. Occurrence-based professional liability insurance policies are also not as readily available as claims made policies.
LIMITS OF LIABILITY
The maximum amount a policy will pay is known as its limit of liability. Limits may be for indemnity only, defense & indemnity within the limit, indemnity with defense costs paid in addition to the limit, or for defense only. Policies with defense costs paid in addition to the stated limit of liability are considered the most comprehensive.
Indemnity payments are sums paid for injury or damages and may take the form of a judgment and award or settlement.
Defense costs are legal fees associated with defending a policyholder against allegations of a professional act or omission which was the proximate cause of damages.
Limits may be expressed on a per claim or aggregate basis or as a combination of both.
Per Claim limits are the most a policy will pay for any single claim.
Aggregate limits are the most a policy will pay in a policy period regardless of the number of claims.
A policy period initiates with an effective date and terminates with an expiration date. Most professional liability policies have a policy period of one year and may be renewed by submitting a renewal application and paying the policy premium.
A policy’s premium is the cost of the insurance.