Professional Liability Terms and Usage Part II

CEOL/DOL/DIAL: These are all variations on the same concept; the policy's aggregate limit will not be reduced by claim payments. But it's not that simple, so keep reading.

The abbreviations stand for Claims Expense Outside the Limit, Defense Outside the Limit and Defense In Addition to the Limit. They all share the same concept and meaning, but there are way too many variations, so read the wording and make sure what is listed and defined is clear to you.

Some of the policies that are more current will have this wording as part of the basic policy form. If it's not in the basic form it might be included by endorsement, so if you're doing a comparison make sure you note any additional endorsements or the absence of same.

Some policies will state that the carrier will pay an unlimited amount of claims expense in addition to the policy limit. Some will only provide claims expense equal to the per claim or aggregate limit and others will offer claims expense in addition to the policy aggregate, but only at a sub-limit and as you might guess, that sub-limit could be less than the policy aggregate limit.

Make sure you read the wording closely. It's easy to fall into the trap of making assumption, i.e. start thinking about the word "claims" and assume it means payments/settlements (indemnity), others think attorneys fees (claims expense or defense costs) and still others assume it means both. This just in from the department of redundancy departement: read the wording!

By example, Arch the local architect buys a $500,000 per claim limit with a $500,000 annual aggregate limit. The policy provides defense coverage in addition to the limit of liability (claims expense outside the limit). Arch reports a claim, the carrier chooses to defend and does not settle. The carrier pays $100,000 in claims expense (legal fess primarily) and zero in indemnity, i.e. they pay no damages. Under the policy the $500,000 aggregate limit remains in tact and is not reduced by the claim expense costs/payment.

If on the other hand Arch purchased an architects E&O policy with claims expense included in the limit (defense costs within the limit) then the $100K claim expense payment would reduce the policy limit to $400,000 for the remainder of the policy term.

For other examples you can see that if you increase the claim payment amount and/or reduce the limit of liability that's purchased, deterioration or erosion of the policy limits can potentially be a significant issue. Whatever limit and option you offer your client, make sure they understand how the limits will work in the event of a claim. (And yes, I know, your client believes he or she will never have a claim. I'm still working on THAT blog entry...)

"Full" Equals "None"? (Professional Liability Terms and Usage - Part I)

As much as possible when quoting or forwarding policy comparisons or summaries to my customers, I try to avoid using abbreviations or other lingo that may not be readily understood. Sometimes items are included in correspondence that may not be clear, so in the next post or two I'll try to touch on phrases and abbreviations you may run into as you work on future professional liability and E&O accounts.

Past Acts Date: Just another way of saying "retroactive date" or what most people call the "retro date". You will also hear it referred to as the prior acts date. That's one of the critical dates on a claims made policy, and it may or may not be different than the policy effective date. It's the earliest date an error or omission could occur and be covered by the current carrier/policy, and it's either the effective date of the policy (see "RDI") or some date in the past. Some carriers add their own terminology, like Travelers for example uses the term "knowledge date". For them that means the date Traveler's first wrote coverage for that account. What it means is the insured is warranting they are not aware (have no knowledge) of any claims - or incidents that could give rise to claims - that occurred before the "knowledge date".

"Full" Prior Acts: This one indicates that there are no limitations regarding the prior acts date. It's used by some companies when they can see that an insured has had continuous claims made coverage for a period of time (ten years, for example) but the insured has been in business for twenty years. Perhaps they can't really identify the exact date that claims made coverage was first put in place, or once it's past a certain number of years it doesn't really matter to the carrier if a date is shown. Strategically, I think it's used to make it more difficult for competitor carriers to know just how far back prior acts coverage might extend on the current policy! (But that's just me...)

"None": How's that for obscure? You may see Declarations (dec) pages on policies show a prior acts date as "none". Don't be confused into thinking that means they don't have prior acts coverage - if there's no prior acts coverage the "retro" date will show the effective date of the policy, or if it's on a quote the quote form might say "incecption date". Remember, a prior acts date is a limiting or restricting condition of coverage, so "none" as a retro date means the insurance company is not showing a date that limits how far back they'll go to insure past acts. (It's the same as "full". If this doesn't make sense, call me and I'll try another way to explain it...)

RDI: Sometimes a broker will tell you all they can offer is "RDI" when you're looking for coverage to include prior acts. RDI is "retroactive date = inception" and effectively means their is no prior acts coverage provided by this policy. (If an account is quoted RDI, then when you look at the quote document the effective date of the policy and the retro date will be the same date). Just remember if you see or hear "RDI" in regards to prior acts, you need to advise your client they have no prior acts coverage if they choose that quote/policy. And if you're new to claims made or prior acts coverage, it's almost impossible to obtain anything other than RDI on a business that's never carried claims made E&O insurance previously. (I say "almost" to cover my assets because I'm sure someone, somewhere has arranged it, or will in the future)

"Tail" Option: On most policies it's shown as "extended reporting period" (ERP) or sometimes as extended "discovery". If you're talking with others within the professional liability industry, most of us call it "tail" coverage. The rather odd terminology is linked to the fact that the option comes at end of the policy term and if accepted, is added on to the "end" of the policy, like the "pin the tail on the donkey" game. Except hopefully you're not blindfolded while arranging for your client's ERP!

What ERP or tail coverage does is add time onto the end of the policy for claims or incidents to be reported, which oddly enough is why it's easier to remember this as the "extended reporting period option" as opposed to the "tail" option. "Extended reporting period" describes it pretty clearly, while "tail" could mean any number of things, none of which I'm going to explore here!

What ERP does not do is continue or extend the expiring coverage for "new" errors or omissions. If your CPA retires and buys an ERP option, he will have additional time to report claims that may arise as a result of his practice - his previous work in effect. If he then decides to "un-retire" and does nothing about his insurance coverage, his ERP will not protect him from errors, omissions, etc that may happen while functioning at his new job, business, etc.