Asking the Right Questions: What to Ask Your Broker When Buying or Renewing a Professional Liability Policy

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Asking the Right Questions: What to Ask Your Broker When Buying or Renewing a Professional Liability Policy
By Jonathan C. Shoemaker and Taylor T. Dolan, Lee/Shoemaker PLLC

Whether you are renewing the policy you have had for years, considering a change in carriers, or buying a policy for the first time, diving into the professional liability insurance market can be daunting. There are many factors that should be considered when purchasing insurance: coverage limits, premiums, exclusions, deductibles, claims team and experience, and the ability to choose defense counsel in the event of a claim. Finding a knowledgeable broker is the first step. Does your broker understand your business and your policy needs, and do they have a strong working relationship with the community and carriers they serve? Once you’ve found a broker you trust, knowing what questions to ask them before settling on a policy and carrier is key.

Understanding the Policy

The prudent design professional should understand the policy being purchased. Most design professionals begin their inquiry into the policy by looking at the financial terms. What are the limits of coverage? How much is the per claim deductible? What is the annual policy premium? How does the policy compare to the insurance requirements in my current contracts and/or the marketplace for my services? Crunching the numbers to understand the financial pros and cons of different policies can help you choose the policy that best balances cost and coverage. But the numbers should only be a starting point.

In addition to understanding the financial elements of the policies, it is important to understand the scope of coverage, as policies vary slightly from insurer to insurer. What is included and expressly excluded from coverage under the policies you are considering? Does your firm need cyber liability coverage (probably yes!), and is there any coverage for this included under the professional liability policy you are considering? Can you bundle your policies (i.e., professional liability, general commercial liability, umbrella/excess policy, workers’ compensation, etc.) to save money and minimize potential coverage gaps? 

The prudent design professional should also ask their broker questions about the carrier(s) under consideration:

• What is the carrier’s AM Best Rating? AM Best is a credit rating agency focused exclusively on the insurance industry. They use a ranking system to depict a company’s financial health, which provides useful insight on a carrier’s ability to pay a claim and meet ratings requirements included in many design services agreements.

• What is the broker’s relationship with your carrier or the alternative carriers you are considering (to understand what leverage/bargaining power and other commitments they may have with the carrier)?

• What is the carrier’s approach to extending coverage for preclaims and claims?

• Should you expect to receive a reservation of rights letter questioning points of coverage anytime you report something to the carrier?

• What is the carrier’s approach to renewing a firm following a claim (i.e., will the carrier renew your policy if you have a claim under your policy)?

• What is the likelihood that the carrier is undercutting the market this year to land your business, but likely to increase your premiums next year at renewal time?

• If your firm regularly requests project specific policies or riders, how is the carrier likely to handle such requests (including how they handle requests for quotes and their average turnaround times for providing the same)?

Every insurance carrier will try to sell you on why they are different from their competitors, but your broker should be able to give you a reality check.

For design firms considering a change in carriers or coverage, it is critical to consider the retroactive coverage date and ‘prior acts’ coverage. Professional liability policies are “claims made” policies, meaning the policy must be in place when a claim is made (not at the time the act, error or omission occurred). Some carriers offer policies on a “Retro Date Inception” or “RDI” basis.  Be careful!  This means that you have no coverage for any services that you provided before the effective date of the policy. Be sure your new policy provides an appropriate retroactive date, and covers prior acts, before you make the change.

How are Claims Handled?

In the event a claim arises, the prudent design professional looks to their carrier to effectively and efficiently guide you through the claims process. An effective and organized approach to claims handling can limit potential exposure and allow your firm to focus on its projects and client needs. Understanding the reporting process and what happens next should be a key factor when purchasing insurance:

• Who will be your assigned claims representative(s) at the carrier in the event of a claim?

• What is your broker’s experience with the claims team?

• How does the claims team and/or claims handling philosophy vary between the potential carriers? In other words, does the carrier take an aggressive and involved approach in defending claims or is settlement at an early stage the goal?

• How is a decision made regarding the appointment of legal counsel?

Perhaps the most important question to ask is which law firm will defend your firm in the event of a claim? Each carrier will have a list of pre-approved or preferred defense counsel they turn to in the event of claim. If you have a law firm you prefer working with, you may be able to include language in your policy that permits the appointment of your preferred counsel in the event of a claim. When you’re able to choose your legal defense team (or at least have a say in the matter), you have the power to choose a firm that understands your company, its people, and services, so it can jump right into defending you at the onset of a claim and thereby decrease early expenses.

Conclusion

Before you buy a professional liability insurance policy, it is critical to understand the policy being purchased, to get to know the carrier you are entrusting to insure your firm, and to become familiar with the claims handling process. This will empower you to make an educated decision when purchasing or renewing insurance coverage and preemptively reduce the headaches and lost productivity often caused by claims.

Jonathan C. Shoemaker and Taylor T. Dolan are lawyers at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals in DC, Virginia, and Maryland. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.

Lee/Shoemaker PLLC is an Educational Program Sponsor of AIA Potomac Valley.