McGowanPRO Professional Liability Blog / Resources / Articles

Saving money is important.  We all want to maximize our bottom line, and reducing expenses (such as insurance premiums) is a key element of any businesses budgetary goals.  However, there are certain products where an initial savings in premium can be disastrous in the long-run.  Insurance is one of these products.

This is not to say that selecting the most expensive insurance premium is always in your best interest.  The point is that insurance is, at its basic, a legal contract between the carrier (insurer) and you (insured).  Too often we see clients who make the decision to select a sophisticated legal contract that potentially impacts their entire practice, based upon a flawed set of criteria; price and/or relationship.

This article will provide a high level overview on why insurance should never be purchased based on price, or relationships.

The Value of Insurance

The reason professionals purchase insurance is to protect their practice against arising from errors or omissions in delivery of professional services.  Keep in mind, a firm does not always have to make a mistake for a client to sue and you would still need a legal defense against any allegations.  A claim against your firm can;

1. Have a financial impact for the legal defense and potential damages
2. Have a financial impact based on lost opportunities
3. Have a financial impact based on personnel time & resources
4. Have a financial impact based on public relations and reputation
5. Have an emotional impact based on concern of all of the above

Your professional liability policy is intended to mitigate the impact on your firm by providing a legal defense and indemnification for damages you may incur.  The issue is that not all professional liability policies are the same.  As previously referenced, your insurance policy is a complex legal document that contains significant conditions, definitions, exclusions, and endorsements that define, amend, and exclude potential coverage.  If you purchase your coverage based on the cheapest premium without understanding the extent of coverage provided, you are not saving money, but in fact undermining the primary reason of purchasing insurance in the first place - protection.

At minimum, prior to purchasing professional liability insurance you should be able to identify:

1. Who is covered under the policy - (named insured)
2. What is covered under the policy - (professional services)
3. What is not covered under the policy – (exclusions)
4. What endorsements modify the policy coverage – (endorsements)
5. Any potential gaps in coverage, and alternative coverage for such
6. The financial strength and experience of the carrier

The Value of Relationships

You might believe that since you have an insurance agent they are responsible for all of the above, and you simply rely on their recommendation.  Yes and No.

Undoubtedly, your insurance agent does owe you certain professional obligations.  However, common law dictates that once you are in receipt of your policy, it is your responsibility to read and understand the policy.  Relying solely on your insurance agent can be a costly mistake.

It is an axiom that not all agents are the same.  You may have a client who is an insurance agent and because of that relationship, provide the professional courtesy for them to handle your professional liability insurance.  This too can be a costly mistake.  Insurance agents typically are “generalists” and professional liability is outside their comfort zone and expertise.  Understanding personal or commercial insurance is vastly different from understanding the nuances of professional liability.   Because of this, a number of the leading professional liability programs are only available to “select” agents.  General agencies do not have access to the entire marketplace, limiting your options.

In addition, a specialized agency will have direct relationships with the underwriters, claims personnel, and law panels adding more clout behind your coverage.

Common sense dictates that working with an expert is the soundest strategy.  Professional liability markets and trends change frequently.  Your agent should be your partner in providing you resources and education on these trends as they happen.  In addition, your agent should be able to provide you multiple options with enough information that you can weigh the differences and make an educated decision.

Measuring your Value

As a professional, maintaining professional liability insurance is essential to protecting your practice, and providing you peace of mind.  Your decision process in selecting insurance should be based on the value that you receive, as opposed to the cost of the insurance.

1. Does the policy cover the services that I provide?
2. Are all of my employees, partners, independent contractors, and others (past, present, and future) covered?
3. Is the insurance carrier financially stable, and have experience in this industry?
4. Does my insurance agent understand my business, the industry, and have a relationship with all of the carriers who serve the market?
5. Does my insurance agent simply provide me just a policy every year, or do they keep me updated on trends and risk management items that are beneficial to my practice?

Honestly answering the above questions will ultimately help you save money, and maximize the value of your insurance.

“Price is what you pay, value you is what you get” – Warren Buffet

Professional to professional referral is common practice in most industries.  A referral can provide value to the client, the referrer, and the referee.  Your client can benefit through a needed additional service, as well as, saving the time in finding an expert on their own.  Referrals can also strengthen your value by showing your interest in the client’s well being, and your connections in the industry.

However, referrals can also expand your liabilities in areas that you may not be aware.  Your liability typically does not end once you have made the referral to another professional.  Here are five things to consider when referring your client to another professional.

1. Always keep the client’s best interest in mind.  This should go without saying, but referrals should not be made on a blanket basis.  Each of your client’s scenarios are unique and referring a client to another professional for unnecessary services may decrease your standing with your client.
2. Confirm that the other professional maintains Errors & Omissions insurance.  This is important regardless of fee sharing agreements and/or indemnification clauses.  The best position is to request a formal “certificate of insurance”.  You will have a formal record, and as a certificate holder you are entitled to be notified if their insurance is cancelled, or non-renewed.
3. Disclose the relationship to your client prior to the referral, and obtain a signed disclosure statement.  This is essential if you are receiving fees, commissions, or any monetary value for the referral.  Transparency is key to maintaining your neutrality.
4. Make sure the referral fees you receive are in-line with industry standards and in relation to the amount of continued involvement on your part.  If your referral fee is higher than industry standards it implies that your role in the continued service is also greater than the industry standard.  When reasonable do not accept referral fees, but rely on good-will to your client, and return referrals as compensation for your efforts.
5. Provide at least 2 or 3 referrals in each circumstance.   Providing options to your client does not completely eliminate your liability, but it does increase the emphasis on their role in selecting the right match for their circumstances. 

The above list is not all encompassing, but it is a start for you to consider in mitigating your liability.  By implementing these items you will provide a better value, while protecting your firm and industry related partners.

According to an article in the LA Times today, the economy grew at a 3.2% annual rate in the last three months of 2010, driven by stronger consumer spending and trade, the Commerce Department reports. Economists expect the recovery to pick up momentum this year, though a shadow still looms over employment.  Read full story

Despite pessimism over the impact of the economy growth on employment an analysis of professional liability applications over the past 4 years shows noticeable improvement in hiring in the Accounting industry.

Accounting professional staff counts from professional liability applications received through NAPLIA:

2006  - control

2007 - moderate growth from 2006

2008 - significant decrease from 2007

2009 - flat

2010 - significant improvement back to 2007 numbers

Although not a scientific study, employment in the Accounting industry can be measured through insurance applications.  Our experience is that the Accounting industry is seeing a recovery and we expect that employment rates in the industry will continue to rise through 2011.

The professional liability (errors & omissions) insurance market has always been cyclical.  In other words, the market will go for a few years with excess capital which means low premiums and an abundance of carriers offering coverage to accounting firms.  However, the capital eventually dries up and those carriers who were looking for a quick profit drop out of the market, leaving fewer carriers, tighter underwriting restrictions and increasing premiums.

2010 was an “extended” soft market for the accountants (and other) professional liability market.  The tightening of capital and low investment returns for insurance companies was over shadowed by the recovering recession.  The market continued to be soft despite economic indicators that would typically reflect a hardening market.

For 2011, we are starting to see some signs that the hard market may eventually come.  Keep in mind, we’ve inaccurately predicted this before.

However, here are 3 specific signs that lend us to believe the hard market is coming:

1. Economy is improving.

According to the Commerce Department, the economy grew at an annual rate of 2.6 percent in the third quarter of 2010, a touch above its earlier 2.5 percent estimate.  Many forecasters expect gross domestic product to continue to expand at a 3 percent to 3.5 percent pace in the fourth quarter.  A separate report from the National Association of Realtors showed existing home sales rose 5.6 percent in November to a 4.68 million unit annual pace, the highest since June but a still-depressed level that was slightly weaker than expected.  Surprisingly, an improvement in the economy allows insurance carriers to improve their investment income and demand more underwriting profit.

1. Carriers look to get off sub-standard accounts and take premium.

We have seen an increasing trend of professional liability carriers electing to non-renew accounts that just a year ago they were willing to take a chance on.  In addition, subsequent to those carriers that have filed formal rate increases, underwriters are being stingier with applying available premium credits.

1. The New York Attorney General sues Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud”

In the property & casualty business they have hurricanes and other natural disasters to harden the market.  Ernst & Young might just be the hurricane of the accounting professional liability market that pushes carriers to finally tighten up their pens.  You can read more about this story here, http://dealbook.nytimes.com/2010/12/21/cuomo-sues-ernst-young-over-lehman/?scp=2&sq=lehman%20brothers&st=cse

In general, no one can predict exactly if the insurance market will harden, or to what extent.  But, there are definitely some signs on the horizon.  In our next blog, we’ll discuss ways your firm can prepare.