Professional liability insurance is one of the tools for managing the risks associated with providing architectural or engineering services. It serves to limit the risk of loss due to errors and omissions in providing the service. But it is not an absolute protection from that risk. What are some of the limitations and issues that can arise?
Sometimes, when a claim arises, coverage can be denied or, at least, limited. It can be a shock to receive a coverage denial or reservation of rights letter from a professional liability insurer. It has become more difficult for insurers to issue outright coverage denial letters so you are more likely to receive a reservation of rights letter. And, even when an insurer would like to advise you of limitations on your coverage through a reservation of rights letter, the insurer needs to think hard about whether to send you that letter. Why?
There is a legal principle that, essentially, says that the insurer's duty to defend is greater than the duty to indemnify. That means that an insurer likely will provide a legal defense even in cases where it appears unlikely that the policy will pay the loss. And, when the insurer defends under a reservation of rights as to possibly not indemnifying the loss, there are rules that cause the insurer to lose influence as to the defense. This begins with rules, in most jurisdictions, that require the insurer to give the insured the right to select counsel. In other words, the insurer may not be able to use their panel counsel with whom they have prearranged terms of employment for the insured's defense. This causes insurers to think hard about sending you that reservation of rights letter. Keep in mind that these rules vary from state to state and it is important to get legal counsel familiar with insurance issues in navigating these issues.
A professional liability claim or lawsuit often begins with a demand based on allegations of the deficiencies in the professional services provided. The insurer makes its threshold determination of whether and to what extent coverage applies based on the specifics of the claim and those allegations. What are some claim scenarios where professional liability insurance may not be applicable or applicable only to a limited extent?
Claim Not First Received While Policy in Effect
Most - maybe all - professional liability insurance is issued on a Claims Made Basis. For coverage to apply the Insured must receive the claim or first become aware of the claim while the policy is in effect. Policies may differ in how this receipt or awareness is defined.
A dispute can arise over when a claim was first received or when the Insured first became aware of a claim. There are certain events that are viewed as clear evidence of the receipt of a claim. A well documented receipt of a service of lawsuit is very strong evidence. But events prior to the receipt of the lawsuit can also be viewed as an earlier notice of a claim. Various scenarios have been described in an earlier post on the issues that can arise.
Act Giving Rise to the Claim Before Retro Date
Although coverage is generally written with the receipt of or first awareness of a claim as the coverage trigger, some policies also contain a coverage limitation based on when the act that led to the claim took place. This is a retro date based limitation.
For coverage to apply the claim must be received or the insured must first become aware of the claim while the policy is in effect and the act that gave rise to the claim must have occurred after the retro date. Disputes can arise as to the precise definition when the act giving rise to the claim took place. Was it the issue date of the plans and specs? Was it when the bid for the work was turned in? Was it when the bid was accepted? Was it when the work in question was started? Or completed? Or paid for? Court decisions have varied and evolved. One interpretation is that design professional's act was not "final" until it can no longer be undone without consequences.
If this issue does come up there are so many variables that potentially impact the outcome that it is best to consult with an experienced coverage lawyer.
Claim Does Not Arise Out of Specified Professional Activity
When an architect or engineer applies for professional liabily insurance, the questions asked by an underwriter include specifics of the kind of practice that is to be insured. Structural or mechanical or electrical or? The underwriter also wants to know what kind and magnitude of projects are worked on. There are other specific questions that, when addressed, help the underwriter determine the level of risk being insured and an appropriate premium to charge for that risk.
When a claim is tendered under that insurance policy one of the questions that needs to be addressed whether the claim arises out of the specific kind of service and project that the underwriter took into account when underwriting the policy. If an electrical engineer is alleged to have made a structural design error, then it is likely that coverage can be denied.
The way the law addresses these issues has evolved with some complexity. Questions can arise as to specifics of how the answers to the underwriting questions were taken into account in underwriting the policy. Questions can also arise about the specific definitions of the service and the nature of the error. For example, the error can be in calculations or making purely technical decisions. Or, the error could be more in the nature of a miscommunication. These complexities are best addressed with the assistance of an experienced coverage attorney.
Claim Not Promptly Reported to Insurer
Some professional liability insurance is not only Claims Made but, rather, Claims Made and Reported. In other words a claim must be both received by the insured and reported to the insurer during the policy period or not later than a specified number of days after the policy ends. Sometimes the problem is not so much that there is no subsequent policy but rather a changed policy limit. On a large claim, determining which policy applies can be important.
One of the issues discussed in an earlier post was when does a project "problem" become a claim that needs to be reported to the insurer to preserve coverage. The insured may view a situation as a normal project problem or dispute that does not need to be reported as a claim. At the same time the insurer may view the circumstances as a claim that should have been reported much earlier. A coverage dispute can thus arise.
As with other coverage issues it makes sense to be conservative and report situations that could be viewed as meeting the policy definition of a claim. And some policies - or applications for policies - may require disclosure of all known potential claims. That is, situations likely to become claims before an explicit demand meeting the definition of a claim is made.
Navigating these kinds of issues may warrant retaining experienced coverage counsel.
Insured Took Action that Precludes or Compromises Defense
Another coverage issue that occasionally arises and is worth some consideration arises when an insurer takes the position that, before getting the insurer involved, the insured took some action that precluded the insurer from being able the defend the claim. Various scenarios are possible. The one we focus on arises when an insured professional who offers to correct a problem for the business reason of keeping a client happy even when there is no fault or actual liability.
For legal liability to exist there needs to be an error or omission that breaches the professional standard of care and results in damages. Mere client dissatisfaction is not enough to create legal liability. And professional liability insurers do not generally agree to cover the risk of having to deal with a dissatisfied client. Insurers undertake to cover loss resulting from errors and omissions. When an Insured makes a concession, admits liability, or tells a client not to worry because they will take care of a problem, the insurer's ability to defend on the basis of no legal liability can be compromised. And the insurer can refuse to indemnify the loss.
This issue that can and sometimes does arise. Insureds need to be careful to avoid making admissions or promises and taking actions that compromise an insurer's ability to defend.
These are certainly not all of the scenarios in which coverage issues arise. But they may be the most frequent. And, as a design service risk manager, it is worthwhile to be familiar with them. If you can think of others that this kind of article should address, please let us know.
This article expresses ideas for consideration and should not be taken as recommendations applicable to any specific situation. When making a decision on how to address a specific situation consulting with an experienced attorney is recommended.
The objective of this blog is to share information about issues that architects, engineers, and their attorneys encounter. If you have any ideas or suggestions for specific topics to address, or if you would like to contribute an article for publication please let us know by submitting a comment.
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