Professional Liability Insurance Definitions

ADMITTED (or LICENSED) Carrier is an insurance company licensed and authorized to do business in a specific state and subject to regulation by the state insurance commissioner. Many states require brokers to seek coverage from admitted carriers first, placing coverage in an excess and surplus (E&S) market only when admitted carrier coverage is not available for the specific firm. An owner may require that the architect’s insurance carrier is admitted. An admitted carrier is licensed and subject to filing and approval by the insurance department. They are also part of the state guarantee fund as well.

Non-admitted carriers are licensed to write in the state but are not subject to approvals by the insurance department as to their rates and forms nor included in coverage by the state guarantee fund. Some states even require brokers to warn the insured person or firm that they are placing their coverage with a non-admitted carrier by stamping the policy to that effect.

AGENT or AGENCY
An agent is a person and an agency is an organization  who  solicit, negotiate, or initiate insurance contracts on behalf of an insurer and can be independent or an employee of the insurer. Insurance agents are the legal representatives of insurers, rather than policyholders, with the right to perform certain acts on behalf of the insurers they represent, such as to bind coverage. See also broker.

A.M. BEST RATING
The Best’s Financial Strength Rating is an evaluation published by A.M. Best Company and represents an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile. The ratings are often used to determine the claims-paying ability, suitability, service record, and financial stability of insurance companies. Other rating agencies include Standard & Poor’s, Conning & Company, Fitch, and Moody’s.  The AIA Trust recommends that insurers have an A.M. Best’s Financial Strength Rating no lower than “A-“, meaning an excellent or superior rating.

BROKER
An insurance intermediary that represents the insured rather than the insurer. Since they are not the legal representatives of insurers, brokers (unlike independent agents)  do not have the right to act on behalf of insurers, such as to bind coverage. While some brokers do have agency contracts with some insurers, they usually remain obligated to represent the interests of insureds rather than insurers. For example, some state insurance codes impose a fiduciary responsibility to act on behalf of their customers or provide full disclosure of all their compensation from all sources. See also agent.

CALENDAR/ACCIDENT YEAR is the year during which policy premiums are earned and claims are reported.

CAPACITY is the maximum amount of Liability insurance limits that a company is willing to write for an insured.

CARRIER
An insurance or reinsurance company that insures or “carries” the insurance or reinsurance.

CLAIM is a demand for money, services or property based upon a right usually found in contract or by operation of law. The Claim expense is the cost associated with the handling of a claim, such as defense-attorney fees, investigation costs, and expert witnesses. There are policy triggers to report a claim such as when one receives a demand for money or services with an allegation of a wrongful act. Importantly, the threat of an action or any troubling circumstance requires alerting the insurance company to a potential problem that may not necessarily become a formal claim – and failure to report a claim in a timely manner may jeopardize coverage.

CLAIMS-MADE INSURANCE policies for professional liability mean that the date the claim is finally made is the triggering event for coverage; the claim has to be made while the insurance policy is in force for coverage to apply. A claims-made policy without retroactive coverage does not cover claims arising out of services performed prior to a date stated in the policy that defines when the coverage commences.

COMPENSATORY DAMAGES are those losses which can readily be proven to have been sustained, and for which the injured party should be compensated as a matter of right.

DEDUCTIBLE is a provision requiring the insured to pay a specified portion of the loss and/or claim expense on each claim – it could be as low as $1,000. Increase the deductible to lower the premium cost. It is important to consider the balance between deductible, premium, and coverage. There will be a new deductible obligation with each claim.

ENDORSEMENT
An insurance policy form that either changes or adds provisions to an insurance policy. Insurance policy endorsements may serve any number of functions, including broadening the scope of coverage, limiting or restricting the scope of coverage, clarifying the application of coverage to some unique loss exposure, adding other parties as insureds, or adding locations to the policy. They often effect these changes by modifying the existing insuring agreement, policy definitions, exclusions, or conditions in the coverage form or adding additional information, such as insured locations, to the declarations page.

EXCLUSION
A provision of an insurance policy or bond referring to hazards, perils, circumstances, or property that are not covered by the policy. Exclusions are usually contained in the coverage form or causes of loss form used to construct the insurance policy. Exclusions can also be added by endorsements.

EXPENSE ONLY CLAIM is a claim that only results in claim expenses being incurred by the insurance company, but with no indemnity payment being made.

FINANCIAL SIZE CATEGORY
To enhance the usefulness of ratings, A.M. Best assigns each rated insurance company a Financial Size Category (FSC). The FSC is based on adjusted policyholders’ surplus and is designed to provide a convenient indicator of the size of a company in terms of its statutory surplus and related accounts.

It is important for an insurance buyer to consider insurance from companies that have sufficient financial capacity to provide the necessary policy limits to insure their risks. Although companies utilize reinsurance to reduce their net retention on the policy limits they underwrite, many buyers are more comfortable buying from companies perceived to have greater financial capacity. The AIA Trust recommends insurers to have a minimum size category of XI.

HOLD-HARMLESS is a contract provision whereby one party assumes another’s legal liability, a legally acceptable practice as long as the contractual transfer of liabilities is not against public policy. The liability assumption may or may not be covered by insurance. Synonymous with “Indemnification.”

Refer to AIA Document A201 General Conditions of the Contract for Construction. Look for hold-harmless provisions before signing any contract for professional services. If the promise is a contractual obligation, the promise may not be covered by insurance. Note that a hold harmless provision could be of limited form, where a party reaffirms responsibility for its own negligent acts thus protecting another party from vicarious liability; an intermediate form, where a party reaffirms its responsibility and agrees to share responsibility for joint and concurrent negligence of both parties; or a broad form, where a party assumes responsibility for all liability including that arising out of the sole negligence of the other party.

INDEMNIFICATION is essentially a hold-harmless provision, an agreement by one party to pay certain specified losses or damages incurred by another party and may also include defense obligations of the other party.

INDEMNITY PAYMENT is apayment to a third party by an insurance company and/or the insured in satisfaction of a claim made against the insured.

LICENSED (Admitted) CARRIERS are those insurers admitted or licensed to write insurance business in a particular state. Each insurer must apply to be licensed in each state and each state has certain minimum financial requirements for each carrier. There is regulation by each state as respects policy forms and rates charged. Also, if a licensed or admitted carrier becomes insolvent , there are generally insolvency or “guarantee” funds which agree to replace the insurer and pay claims on behalf of insureds in that state. Each state has different limits of liability and coverage which are included in such guarantee funds. See ‘Admitted’ definition.

LOSS CONTROL SERVICES
A risk management technique that seeks to reduce the possibility that a loss will occur and/or reduce the severity of those that do occur. Also known as risk control or safety. For example, contract review performed by an architect’s agent, broker or insurer is an important element in protecting an architect’s assets. Use of AIA documents for services and construction help in controlling exposures to lawsuits for architect firms. Other loss control services would include a firm operational review from an insurer or broker identifying areas of concern such as overall project management, record keeping, dispute resolution and contract management.

MANAGING GENERAL AGENT (MGA)
A wholesale insurance intermediary with the authority to accept placements from (and often to appoint) agents on behalf of an insurer. MGAs generally provide underwriting and administrative services requiring specialized expertise to underwrite policies, and handle policy issuance on behalf of the insurers they represent. These arrangements are most common in the surplus lines marketplace. MGAs benefit insurers because such expertise is not always available within the company and would be more costly to develop on an in-house basis.

OCCURRENCE INSURANCE is a type of insurance whereby coverage is provided for a claim stemming from an event when the insurance policy was in force even if the claim is made after the policy expires.

PREMIUM is the amount paid by an insured for the coverage to be provided by the insurance company.

PRIOR ACTS is an insurance provision to consider when changing carriers or buying coverage for the first time. Firms can buy coverage for professional acts and services that took place before they first became insured or when they were insured by another carrier. The scope and availability of prior-acts coverage varies from insurer to insurer. Often prior-acts coverage is available to eligible firms after they have been covered by a carrier for some specified amount of time.

PUNITIVE DAMAGES are damages which are awarded separately from compensatory damages. Punitive Damages are awarded based on a finding of malicious or wanton misconduct on the part of the defendant, and are intended to serve as a punishment and a deterrent to others. Punitive Damages may be covered by Professional Liability Insurance depending on the insurer and the laws applicable in each state concerning the insurability of such damages.

REINSURANCE is a transaction whereby one insurance company agrees to accept all or part of the risk originally assumed by another insurance company.

RETROACTIVE COVERAGE provides coverage for claims made during the policy period arising from negligent acts, errors or omissions occurring before coverage commenced, if the insured had no prior knowledge of a claim or potential claim arising out of such negligent acts, errors or omissions. A claims-made policy without retroactive coverage does not cover claims arising out of services performed prior to a date stated in the policy that defines when the coverage commences.

One of the unique aspects of professional liability insurance for architects is that the coverage trigger differs from most liability insurance. If there was an event that an architect was unaware of prior to the firm’s current claims-made professional liability policy period, it is critical that the architect continue to maintain professional liability coverage with no restriction as to a “retroactive date.” A fairly typical definition of a “retroactive date” is the date on or after which any alleged or actual act, error or omission must have first commenced in order to be considered for coverage under the policy. A declarations page of a professional policy might indicate “full prior acts” in which case, there is effectively no “retroactive date” and thus no restriction as to the date of the alleged or actual act, error or omission. Claims-made insurance requires that the claim be made while the insurance policy is in force for coverage to apply.

SURPLUS LINES refer to insurers which are not licensed in a particular state but are non-admitted or excess and surplus lines insurers. Policies are written by surplus lines insurers because licensed or admitted insurers will not provide the needed coverage.

Licensed carriers may not want to write the coverage because the coverage line presents catastrophic loss exposures, unique risks or professional liability risk similar to Architects and Engineers Professional Liability. As a surplus lines insurer, there is little regulation relating to pricing or policy forms. Most A&E Professional Liability coverage is written by this market.

TAIL INSURANCE addresses the question of protection upon retirement or withdrawal from practice. In most cases, the coverage is available to architects who have been insured for a minimum number of consecutive years with their insurer prior to retirement; the policy then covers the retired architect for prior acts.

Some insurers offer professional liability coverage to continue the protection needed by architects who withdraw from active practice. Typically, an architect who retires may purchase an extension to a firm’s policy to be covered for all prior acts, even if claims are made in the future. Usually “tail” coverage is arranged by endorsing the basic policy. Some states require admitted carriers to provide some level of tail coverage at an extra cost to the insured. Coverage is similarly available to protect the estates of deceased architects if this is warranted.

UNDERWRITING
The process of determining whether to accept a risk and, if so, the amount of coverage that is acceptable for the risk and the rate. Underwriters are companies, individuals, or insurance companies that determine the amount, price, and conditions under which the submission is acceptable.