The purpose of Professional Liability Insurance is to step in where loss prevention fails. The class of Insurance that should do this, is a broad form of Professional Liability coverage - but it is not an all encompassing or blanket protection - it should pay valid claims subject to the policy terms and conditions. The protection that is offered by your Professional Liability insurance policy could be lost through ignorance of its terms, and failure to understand its operation.
It is a universal phenomenon that the only real incentive to reading an insurance policy is when a claim is to be made under it. This article will attempt to highlight some aspects of the policy as they relate to claims. The writer hopes to demonstrate the danger of losing the protection afforded by the policy through lack of awareness of it's provisions, and the writer hopes to provide the applicant with some practical guidance about what you can do now and at the time that you are faced with a claim, in order to minimise trauma and ensure that the claim will be satisfactorily resolved.
The first step is obviously to recognise a claim situation. There are two possibilities.
For the sake of brevity, the word "claim" is used loosely to describe either of these situations.
Either way the Insured is faced with a possible claim and presuming our universal phenomenon holds true, the Insured now reads the policy. It should tell the Insured, that it is the making of a claim, which is insured. It is also a condition precedent to indemnity under the policy, that the Insured must give notice in writing of any circumstance which the Insured could reasonably expect to be the basis of a "claim", as soon as practicable after they first become aware of the incident or claim. Now that a claim has been reported, what happens next?
The policy like most Professional Liability policies is a "Claims Made" policy. It covers claims made and reported during the currency of the policy, regardless of when the act or omission giving rise to the claim occurred, provided that the Insured was unaware of the act, error or omission at the inception date of the policy. It is now clear that the policy will respond to claims made during its currency, no matter how long ago the services were performed (subject to the policy not having a "retroactive limitation". It is also clear that claims made after the expiry of the policy are not covered even though the services giving rise to the claim were rendered during the policy period. Due to the long interval which usually exists between the time a negligent act, error or omission occurs and the time the resulting claim is first made against the Insured, it is paramount that you maintain a current policy with full prior acts cover if you wish to be covered for both current and prior work.
A situation which we often come across illustrates clearly the consequences of failing to understand the "claims made" rule: Some professional firms, about to enter the transaction involving a large project, are made to increase the limit available under their insurance. Then, when that project is completed, they allow their insurance to be reduced to much lower limits of liability. In not fully comprehending the "claims made" rule, they failed to
recognise, that a claim emanating from that transaction may not be made in the year in which the higher limits are carried, but in a subsequent year when the lower limits are again in effect. When you purchase increased limits to cover a specific project or because an owner demands that you do so, you must continue to carry those limits indefinitely or at least until you are certain that an exposure no longer exists. You may also consider that maintaining those limits is no longer worth the cost. In construction projects the "highest risk" is considered to be six months prior to the completion of construction and up to three years after substantial completion is attained. However, as there is no statute of limitations in most Provinces of Canada, the "risk" can continue indefinitely. (In most Provinces, the present statute of limitations, provides that the claim must be brought against the design professional within six years of the design professional first being made aware of the potential claim. Alberta has a potentially less restrictive Statute of Limitations that at the time of writing, has not yet been tested in a court of law).
On receipt of a claim report, the Insurer will verify coverage. This means it will determine first that you hold a valid policy of insurance or are otherwise insured under the policy.
Once it has been determined that the claim comes within the terms of the policy, the Insurer will set a preliminary dollar reserve and in conjunction with its appointed counsel or adjusters, will decide on the course of action to take. The duties of the Insurer are spelled out in the Insuring Agreements. The Insurer may either defend suits brought against you or settle them with your consent.
If the Insurer decides to defend the alleged claim, it will do so even if the suit is groundless, false or fraudulent. It will pay the costs of defence usually in addition to the available limit of liability, If the limits of liability are $2,000,000 or less (some insurers are $1,000,000 or less) and the suit is brought in Canada and arises out of a project located in Canada. It should be noted that in some wordings the defence costs fall within the limits of liability. Note, however, that if the damages awarded exceed the limit of liability, the costs and expenses will be shared in the proportion that the amount of the limit bears to the amount required to be paid to dispose of the claim. So, for example, if the claim exceeds the limit by 20% the Insurer will pay 80% of the damages and 80% of the costs of defence and the balance will be uninsured.
If the Insurer decides to settle the claim it will not do so without your consent. However, if you refuse consent the Insurer may require you to continue to negotiate or defend the matter independently and if in acting on your own you run up damages, costs or expenses beyond the amount for which the Insurer could have settled, you will have to pay the difference.
Very briefly, in practical terms this is how your insurance contract will relate to a claims situation. Having been through this hypothetical ordeal what can you do, to ensure payment of valid claims by your Insurer in an efficient and economical manner. This is very important. The success of any insurance program depends on this. From the statistics that have been given out at various Loss Control Seminars, there have been unprecedented increases in both the frequency and severity of claims over the years. This, along with inflation, has caused the withdrawal of many insurance carriers from this class of insurance over the years. In order to maintain a long term, stable insurance program, the writer strongly urges and encourages all insureds to play a part in the reduction of losses. He regrets that traditional ways of obtaining this type of protection at a reasonable cost without having to make any special effort to prevent losses, has become a thing of the past. In this class of insurance, the interests of the Insurer and the Insured are not competing, they are common, with both parties looking for longevity, stability and success. The following points will assist ALL design professionals and firms to play their part:
Firstly - please read your insurance contract.
Secondly - please make sure that you maintain a current policy with adequate policy limits and cover.
Thirdly - please keep your broker advised of changes that may affect your insurance protection - changes of status, activities, changes in the legal structure of the firm, mergers, acquisitions, dissolutions. Many of these changes may affect the insurance and if you are unsure as to the insurance consequences of changes you make or contemplate, please consult a broker who specialises in this class of insurance.
The information contained herein is believed to be accurate, but individual circumstances, local business and insurance practice and the Law can vary extensively and Jardine Lloyd Thompson and its associated and subsidiary companies are not responsible for any errors and omissions or any loss or damage arising from the use of this information. In the event of situations such as are described in this bulletin, the reader should seek legal counsel and specific advice from Jardine Lloyd Thompson or your Insurance Broker.