If you insure even a handful of professional service firms, you’ve probably encountered a few clients who make two incorrect assumptions: that they’ll never be sued because they haven’t been sued yet, and even if they are, they’ll have coverage under their general liability policy.
“That’s not the reality, though,” says Michelle Aliperti, vice president, professional liability, CNA. “Agents should offer an unsolicited professional liability quote to every one of these clients to round out their insurance program, and they should do it every year. This isn’t a conversation you can have once and then never bring it up again.”
As the U.S. continues to move further away from a manufacturing economy and toward a service-based economy, “that presents new opportunities for insurance markets,” Aliperti points out. “Agents need to be reinforcing the importance of this coverage.”
Here are three important issues you need to pay attention to in order to not only convince your prospects that they need a professional liability policy, but also make sure they’re purchasing the best coverage available:
1) Underwriting scrutiny. Aliperti says the professional liability insurance space has been “very competitive” over the past few years. “More recently, we’re seeing more pricing discipline and more underwriters pushing for incremental rate increases on their smaller, well-performing professional liability accounts. We’re also seeing more meaningful increases on their larger accounts.”
Insureds with historic losses and insureds in higher-hazard business segments, meanwhile, “will see even more of a rate correction,” notes Aliperti, who says professional firms that provide services to consumers rather than businesses tend to be particularly problematic for underwriters. “Claims experience often drives future claims experience.”
And according to John Boykin, president & CEO, B+H Insurance (BHI) in Newark, Delaware, all of the above has made the underwriting process for professional liability insureds much more stringent.
“Applications are getting longer,” Boykin says. “Everybody wants a claims supplement now, even if it was just an allegation, and we’re seeing a lot more requests for résumés of individual employees. But you send a prospect a 15-page application and they look at you like you’re crazy. It can be a challenging, painful process.”
What exactly do underwriters want to know before they take on a risk? As more insurers start to adopt a predictive approach to underwriting, “they’re not necessarily asking, ‘What have you done the last five years?’ They’re asking, ‘What do we think you’re going to do the next five years based on your controls, the quality of your staff and everything you have in place?’” Boykin points out. “Just because you haven’t had a claim doesn’t mean you’re not going to have a claim tomorrow.”
2) Contractual requirements. Perhaps it’s not surprising, then, that Aliperti has observed an increase in the number of professional service providers who are contractually obligated to carry professional liability insurance.
“Sometimes we’ll see requests for a project-specific policy, where they only want coverage for the services they’re providing for that one client that’s requiring the contract,” Aliperti explains. “Or, sometimes they’ll take it a step further and say, ‘Well, if I’m going to buy the coverage, I want to buy it for all of the services I’m providing.”
But if the class is a tough one, fulfilling a contractual requirement may require “getting creative,” Boykin says. “Depending on the limit of insurance, we may end up layering it—putting a tower of coverage together with two different $5-million options, or whatever it might be. I’ve had clients in very difficult industries with bad claims histories, and we’ve still been able to get them coverage. They don’t like the price, but we’re able to fulfill the requirement.”
3) Hammer clauses. This is an area where paying close attention to policy language could end up saving your client hundreds of thousands of dollars.
With a traditional hammer clause, if an insured gets sued and the professional liability carrier can settle for $100,000, consider what happens if the insured decides they’d rather fight it: If the claim ends up settling for $300,000, “the insurance carrier’s only going to pay that $100,000,” Boykin explains. “The client’s going to be on the hook for the remaining $200,000.”
But when you’re dealing with professionals, “their reputation is everything,” Boykin points out. “If you have a hammer clause in the policy and you get sued, a lot of times you’re going to be choosing between potentially self-insuring a claim and giving up your reputation, or fighting for your reputation but paying hundreds of thousands of dollars out of pocket.”
Securing a pure consent to settle clause “makes it a much better policy,” Boykin suggests. In the absence of pure consent to settle, even a modified hammer clause could be a better option for your insured—language that offers, for example, a 50/50 split on the difference between what the insurer agrees to settle for and what the claim ultimately ends up costing the client.
“It does put some skin in the game of the insured, but paying 50% is a lot better than paying 100%,” says Boykin, who recently poached a new client from another broker by offering a modified hammer clause. “It was a 35-person law firm—these guys are pit-bull attorneys, and they would want to fight any claim tooth and nail. But they weren’t even aware that they had a full hammer clause in their policy.”
In that instance, Boykin was able to offer not only better coverage, but also a more competitive premium. But “even if you end up paying a little bit more,” he says, “that ability to fight for your reputation is worth it.”
Jacquelyn Connelly is IA senior editor.