FAQ – Commercial Specialty

Professional Liability

Professionals, such as doctors, lawyers and accountants, have long been held highly accountable for the consequences of their decisions. While such professions are still the Big Three, there are a growing number of other occupations that represent an exposure to liability loss that needs special protection, including pharmacists, architects, engineers, opticians, beauticians, insurance agents, consultants and many others.

In most instances, a type of coverage called a general or commercial general liability policy will protect a business against the damage or injury their actions may cause to others. However, this type policy is designed to handle routine, fairly generic and low-risk activities. Examples are customers who cut their hands on a sharp edge of an office’s reception desk or a customer who is hurt when she collides with a clerk who is stocking a shelf. Much more is at stake with professional activities. Consider several aspects that make professional liability tougher to insure:

Professional Advice – The persons needing insurance are sought out by the general public as experts who can assist with special issues such as personal health, expensive business transactions, or personal crises. Many of these situations also involve a high-level of emotion. When something goes wrong, it is much more likely that a client will pursue “justice” through the courts.

Professional Reputation – Any claim a client makes against a professional involves that individual’s reputation. In so many instances, paying such a claim is an admission that a mistake was made. The professional may suffer from a lowered status and could face sanctions from related professional associations or regulatory authorities. Further, many professionals are proud of their standing and their abilities; admitting being wrong is usually fiercely resisted.

Higher Defense Costs – Defending against claims of professional error or incompetence is usually very expensive and time-consuming. Trials will usually involve expert testimony and technical arguments. Since a claim or lawsuit is often viewed by the professional as an attack on his or her abilities, the chances of resolving issues quickly (particularly via a settlement) is extremely low.

Identifying A Loss – The timing between when a loss occurs and when a claim or suit is filed can be a mystery. A professional may find out she’s being sued today for something that happened ten years ago. The potential for a huge time gap before a loss arises makes professional liability a very difficult type of business to underwrite and to price.

You have invested a lot in your business and your profession. It is important to be sure that you take the steps to deal with the special as well as the routine sources of loss. As usual, it is always a good idea to discuss your questions and needs with an insurance professional.

Workers Compensation Coverage

Outside the home, the workplace is the most common place for a person to be injured. Therefore, all states have passed laws requiring employers to handle certain losses that happen at work. In other words, states have created a statutory (written or enacted) obligation to provide coverage.

The Workers Compensation And Employers Liability Insurance Policy is used to provide insurance coverage for a company’s statutory liability (coverage responsibility) under a Workers Compensation Act. It usually involves paying for medical treatment and disability. It also handles lawsuits from injured workers that fall outside of the Acts.

Essentially a workers compensation policy responds to mandatory benefits for accidental injury that occurs during work. However, the injury must also be related to the injured person’s duties. Further, the policy also covers costs associated with disease or death that may be a result of the accident. If the employee’s injury does not qualify for compensation under the Workers Compensation Acts (or Occupational Disease Acts, if separate) the policy will respond to the employee’s allegation of employer negligence. The insurance coverage provided by the basic policy may be expanded, restricted, clarified or brought into compliance with specific state regulatory requirements through the use of endorsements.

The type of business that can be insured with a workers comp policy may be an individual, partnership, joint venture, corporation, association, fiduciary, or other entity. A typical policy lists the locations of the workplaces that are covered. The policy is designed to handle work-related accidents as well as diseases. The amounts that must be paid are defined by the state or jurisdiction where a covered incident occurs. The policy usually lists the other types of costs and expenses that are eligible for payment under the policy.

In other respects, a workers compensation policy is similar to other kinds of insurance. The policy benefits include being provided a legal defense against certain types of lawsuits. The policy explains that, when other sources of loss payment are available, the policy will begin any payment once the other source has paid its obligation. However, the policy will not pay for any amounts that exceed stated benefit amounts. Generally the insurer that provides coverage acquires the covered company’s legal right to pursue payment from a party that may have been responsible for a workplace injury.

Directors and Officers Coverage

Is your business incorporated? Does it have a board of directors and corporate officers? Do you serve on a Board of Directors? If the answer is yes to any of these questions, you could be exposed to suits from shareholders for acts that ‘de-value’ the corporation. While protection exists under Directors & Officers (D&O) coverage, small and medium-sized corporations often consider it too expensive or unnecessary.

Decisions made by directors and officers impact the viability and value of a corporation. Considering the current issues of accounting practices, reporting and use of corporate assets and the increase in suits being filed against executive boards; this position should be re-evaluated.

D&O coverage should no longer be considered a luxury, but rather a necessity for corporate entities. The coverage supplements the protection provided by General Liability policies since the former responds to legal actions filed by shareholders, customers, scorned merger partners, creditors and regulars.

Board of Directors must take steps to determine that D&O coverage exists. Boards should also identify the level of coverage available for handling defense costs since this expense is handled by the overall policy limits and is not a separate coverage. Criminal acts are not covered by D&O Insurance. However, the cost of providing a legal defense until criminality is determined may be covered.

In the past it was common for a director to handle the risk of a lawsuit by accepting a corporation’s indemnification agreement. In other words, a corporation would agree to handle the cost of litigation (and any settlement) out of its operating funds. Today such agreements have little value when the business is in bankruptcy or ceases operations.

The increase in shareholder lawsuits has created a much tighter market for this coverage. Today, corporations needing the protection must be willing to provide detailed financial and operating information to D&O insurers. This information is mandatory and businesses should not let their concern over protecting such data be a barrier to securing this coverage. The stakes are too high.

Employment Related Practices Liability

There are numerous state and Federal Laws about the workplace, governing anything from payment of overtime to dealing with sexual harassment. Whether Federal Laws apply depends upon the number of employees (typically 15 is the dividing line). Individual states must enact laws that are at least equal to the Federal laws, but they may also be more stringent.

Many states operate under the “employment at will” concept, where either the employer or the employee may, without reason, terminate employment at any time. In its pure form, employment can be terminated for a good reason, a bad reason or no reason. However, this concept is being eroded by laws governing termination reasons as well as employment conditions.

Hiring and firing practices have become legal minefields that have spurred the development of Employment Practices Liability Insurance (EPLI). It is important that a business has clear policies that are applied consistently to each employee and that directly relate to their job. The best defense against employment practice claims is knowing the law in your state and then having policies and procedures that meet the legal standards. For example, is it legal to terminate:

  • a driver with a bad driving record?
  • an employee who is rude to your customers?
  • an employee who swears at customers?

Don’t think that the answer is simply “yes.” A business’ action may depend upon circumstances such as whether an employee’s duties involve driving a company vehicle, or directly involves customers and if the company can prove that such behavior fails to meet the applicable job standards.

One key issue is having access to legal counsel that has expertise in this special area of the law. Another key issue is documenting the essential job functions and establishing measurable standards for each position. Use of regular performance reviews and applying the standards equally to each employee is a smart employment practice. The best defense against employment practice claims is to know the law in your state and then having policies and procedures that meet or exceed its legal standards.

The U.S. Department of Labor offers a Small Business Handbook from their Website at http://www.dol.gov/asp/public/programs/handbook/main.htm. The U.S. Equal Employment Opportunity Commission also offers numerous publications addressing different employment laws from their Website at http://www.eeoc.gov. Contacting an insurance agent regarding Employment Practices Liability Insurance is another avenue to explore. Policies and premiums for this type of coverage vary tremendously among insurers. Many companies offering the coverage also offer assistance in writing policy and procedure manuals and other ways to reduce the potential for claims involving sexual harassment, wrongful termination or discrimination. No business is immune from these claims.