Errors & Omissions Insurance

[William Sinclair]

I am curious to hear from those with experience carrying E&O insurance who is a reputable company to consider for coverage and information. Who has treated you well? Who hasn’t?

Is there a standard level of coverage LAs get?

Can you be covered under an owner’s insurance? How does that work?

I am doing some counting of the costs for doing some freelance work and any good insight would be helpful.

[Chris Whitted]

I’ll be interested to see what other responses there are (specifically on costs and companies), as this is something I’m looking at as well. The only name I know of and that a previous firm I worked for used was Leatzow.

I can tell you that most state licensure laws have a provision/requirement for a minimum amount of professional liability insurance. You might review your state’s to get a starting point. The client and job can also come into play – some will require their own minimum amount, either as a business practice or because of their own insurance requirements.

If you are working for a firm and looking to do freelance work, you should NOT rely on the firm’s insurance. You would only be covered for work done for the firm, and this is a quick way into a whole lot of legal trouble. Many firms have policies against moonlighting specifically for this reason. Why would the owner want to cover expenses and liability for you when s/he sees no profit for it?

And just in case I misunderstood what you meant by owner’s insurance, my understanding is business owner’s insurance and E&O do not cover the same things and you may need both.

[William Sinclair]

Thanks for the good information. I hope others will illuminate as well.

[David R. Carothers, CIC, CRM]

Let me put a quick disclaimer on this. I am not a transactional insurance agent. I am a risk management consultant that works with technology and life sciences companies of all shapes and sizes. I have the ability to place insurance, but our goal is to educate our clients to make sound business decisions and transfer as much risk as possible which enables them to either get better pricing on their insurance product or transfer risk contractually and remove the need for insurance. I am more like an accountant or an attorney as I am trusted advisor as opposed to someone trying to sell you something.

Now that we have that out of the way, there are a ton of considerations when it comes to professional liability. I wish I could tell you that it is a one size fits all product, but it isn’t. Professional liability is a fickle mistress that will tempt you with price and leave you at the altar at the time of a claim. Some things that you need to look for specifically are:

1) Is the policy on a claims made and reported or a plain claims made form. This is a big difference at the time of loss.

2) What is the “hammer clause” in the policy? It is often called a consent to settle clause as well. Basically what this does is protect the insurance company. In the event you have a claim and there is an offer to settle, for say 25k and you choose to continue to fight the claim because you want to preserve your reputation. After litigation, the claim pays out at 100k rather than the initial 25. You are on the hook for the additional 75k Not good. You want a liberal consent to settle clause that will split the difference with you 75%/25% with you being the 25%.

3) What type of deductible do you have? Is it per occurence or per claim? Is their a definition of a claim that will lump all claims on a specific incident together?

4) What type of financial qualifications do you need to have to get coverage? Professional liabilty pricing is directly related to the financial health of your organization. The better your financials, the better the pricing.

5) What does your customer agreement look like? What you do in your client agreement in terms of hold harmless, breach, warranty and remedy can be the difference between you getting into a admitted market or excess and surplus lines.

6) What do your contracts require you to carry? Do the requirements match up to the exposure of your job? I have a client that was going to do some food testing for the city of New York. The contract was 36 pages long and the insurance requirements were ludicrous. I asked him how much he was going to make on the job and he replied it’s the city of New York. I told him that he would want to flag his marketing budget for the 20k increase in premium if he did the job because that was all he was doing…marketing. It wasn’t worth the cost just to say he had the city of New York as a client. Most contracts are negotiable if you know how to talk to your customer. I run into the situation all the time where a client has a signed contract and then is forced to comply. Share the contract with your advisors on the front end. It will allow you to negotiate and will save you a lot of money in the long run.

7) What are the payment terms? Can you break the premium up into payments or do you have to run through a premium finance company? If you have to go through premium financing it isn’t a big deal but you want to be sure there aren’t added interest points or an increased interest rate.

8) What is the financial strength of the company? Are they going to be around again or are they going to be the next government bailout?

9) Most importantly, the description of operations on your policy has to be 100% accurate. Anything that you do outside of the description of operations is not covered.

10) Be honest on your application. The application is made a material part of the policy upon issuance and can come back to haunt you if you stretched the truth.

11) Be conservative on your projections. If you know you are going to do 1.5 mm in sales this year, use that number. If there is an outside chance you coudl do 2mm in sales, stay with the 1.5mm. The company will audit you at the end of the year and you can pay the difference in premium owed at that time. Don’t let them have your money for a year, you need it to grow your business.

12) Stay away from products that throw in some limited professional coverage on a business owners policy. It is a recipe for disaster.

I know that you asked if there was a reputable company out there and the answer is yes. There are a handful of domestic companies that offer great products fro technology and life sciences clients. They do their homework on the underwriting end of things and are able to offer very competitive rates as a result. Chubb, Travelers, Zurich, Hartford, Ace, C N A and One Beacon are a few off of the top of my head.

If you have any other questions, or would like to read more about our philosophy, I have a couple of case studies posted in addition to some content at http://www.hubpages.com/profile/praxiom. You can also connect with me on twitter at @drcarot or @praxiomrm. I have also posted bios and some overviews on slidshare, our username is Praxiom.

I hope that I have helped answer some questions. I may have made your head swim even more. Feel free to contact me if you would like me to help further.

[David R. Carothers, CIC, CRM]

Also, professional liability policies/errors and omissions poolicies work the same regardless of inustry. There may be a nuance here or there that is differenct, but regardless of occupation, the above comments are safe and applicable.

[William Sinclair]

Thank you, David. Your detailed response affirmed my internal sense that there must be some important nuance in getting a fair and reliable deal regarding E&O Insurance. I appreciate that you laid out some specific areas of concern.

This is definitely the sort of thing that could make or break a fledgling practice. It sounds like you might be in the business of reviewing the description of operations… is this expensive?

Why would I go to a risk management company rather than a lawyer specializing in business contracts?

[David R. Carothers, CIC, CRM]

Risk Managers and Lawyers read contracts differently. A lawyer looks at a contract to make sure you are protected and the contract is legal. I look at the contracts to make sure that the nuances are in the contract that will save you money on the placement of the insurance product. I guess the gest way to describe it is that risk management professionals and attorneys work in tandem to give you the broadest picture. A typical transactional insurance agent will ask you for a copy of your contract, have you fill out an application, attach the contract to the application and come back with a variety of quotes without ever reviewing the contract or giving advice. Essentially, they collect it as an underwriting support document and just shuffle it along with the other paperwork. As a consultant, I get compensated one of two ways. I either establish a service fee for my more complex clients, much like an attorney or accountat, or I take a commission from the placement of an insurance product. For larger, more complex operations, the service fee makes sense for both parties because there are a lot of moving parts and it allows both parties to budget and manage expenses. For smaller and emerging businesses, it makes more sense to take the commission and disclose that amount to my client so that they know what I get paid. It is not really that expensive, it just depends on the size of the engagement. It really boils down to the value that you give your clients. You can pay a premium, pay an agent commissions and do it over the phone with no support, or you can do the same thing and gain the insight and expertise of someone like me.

There is one other important thing to consider with professional liability that I forgot to mention when I was shaking the cobwebs out last night, and that is tail coverage. Because the coverage is on a claims made basis and not an occurrence basis, you are required to have coverage in place when the claim is made. When the policy expires, if coverage is not replaced wtih another carrier, you have a 60 day grace period for claims to come in and then coverage ends. The question becomes, what happens if you buy insurance for a specific project because it’s required and then you don’t renew? Two years down the road there is a professional liability claim against your work. You have no coverage. Once you buy it you have to maintain it, or you buy what is called “tail coverage” . Tail coverage eliminates the scenario I just described. It protects you from events in the past. You can buy tails for a specified period of time, or you can buy them for an infinite time. Tails are usually sold as a multiple of premium.

[William Sinclair]

Does your service include negotiation with the underwriter or is it more of a review that will inform someone else (like a lawyer or the client) to negotiate the terms?

I have heard of the need for continued coverage after the fact. Now I have a name for it. If you choose the “infinite” tail coverage option, are there infinite premiums?

So, you mention buying E&O insurance for a single project. Is that how it usually works or do LAs carry a general policy to cover whatever might come up? Also, as a start up (doing some moonlighting), is it better to go this way — on a job-to-job basis?

[David R. Carothers, CIC, CRM]

I negotiate directly with the underwriters because I have the ability to tell the client’s story. More importantly, I have a bucket of premiums with each underwriter that I can use to leverage if need be. I apologize for the typos in the last response, by the way. My computer is skipping characters for some reason and I didn’t catch everything. I can assure you I know how to construct a sentence 🙂

I probably wasn’t clear on my thoughts on the per project deal. What I wanted to convey was that many people buy insurance to get a specific contract or a specific deal done. They do this because it is what their customer is telling them they “have” to do, not because it is in the best interest of their company. Once they complete the job, they carry the insurance until the end of the policy period and then they let it lapse. They may go a couple years before they need it again and then they buy it specifically for another contract. THIS IS NOT A GOOD WAY TO DO IT. You should always maintain continuous coverage because your liabilities don’t end when the job ends. They are infinite unless your state has some sort of a statute of limitations.

Tails are all over the place in terms of pricing. It really depends on the period. I would tell you that you can usually pick up an infinite tail for 2x the annual premium. Meaning, if you pay 5k per year, you can get an infinite tail for 10k. The people that usually get hammered the most on tails are Docs. Also the other thing that needs to be done is making sure you have a correct “retro date” to cover all the way back to the first time you had coverage. If you purchase a policy and two years from now, someone gives you a better deal, you can move the coverage, you just have them give you coverage for prior acts all the way back to the first date that you had coverage with the other carrier. This is a standard practice and doesn’t cost anything to do, it is part of constructing the policy directly.

[David R. Carothers, CIC, CRM]

Will,

While I have no direct experience with the firm mentioned above, I did peruse their website and it looks like they have a quality product specifically designed for your occupation. More importantly, they hit all of the correct key buzz words that I mentioned above in terms of contract review and a more traditional risk management approach as opposed to selling you a product. The best thing that I read is that they are up front with you about the fact that they expect you to operate your business professionally and if you don’t, you aren’t the right fit for them. I would say that it is worth a phone call to them, they can do you far more good than bad.

—David

[Paul Deering]

I’ll pass along that I’ve been with Leatzow for maybe 15 years now and I’ve found them responsive by US mail, phone and email, and having been through two lawsuits with them, I have to say they’ve been great. I’ve been in business for over 30 years in California, so two suits is probably not bad, though at the time any lawsuit is horrible. Lawsuits put you at a disadvantage in a world that you are not familiar with and cannot control even though you have a crystal clear understanding of the subject being litigated.

The other bit of information that I’ll pass along about the whole world of litigation is that you really need an attorney that can put the fear of god in the minds of the opposing attorneys. The opposing attorney needs to know that your attorney will make their life miserable (remember that the plaintiff is probably working on speculation, so getting tossed out is a possibility). Your goal is to get dismissed from the case as early as possible or to get though arbitration as early as possible. Time is what kills those named in suits – it uses up your deductible, then takes more from your insurance company. The plaintiff’s attorney has no incentive to speed things along. In both of my cases, Leatzow agreed to use my attorney to represent me. I think this was critical to controlling my costs.

In California most municipalities that you work for require a million dollars of coverage – for park projects for example. You’ll often be asked to provide two million, but I’ve been successful in arguing that this amount was probably designed for architects who’s responsibility usually covers much more expensive building projects. Just ask about this requirement and tell them that you can provide it, but that you’ll have to increase your coverage and apply the extra cost to your fee.

[William Sinclair]

Paul,

Thanks for getting into some of the nitty gritty involving lawsuits. I will remember your words of wisdom regarding time/cost of being one of the ‘named’ in a lawsuit. Very good to know that you have had a positive experience with Leatzow when it counted the most.

[William Sinclair]

Thanks, Keith!

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