Choosing a Limit of Liability in a Professional Liability Insurance Policy
Nov 20, 2019
By: Miri Levhar, VP, Itzick Simon - the leading construction insurance agency In most insurance companies, a professional liability policy is divided into two main sections. The first section, whose function is to protect the insured and provide him with coverage against claims for professional negligence, and another section that provides protection and insurance coverage against claims regarding damages caused to third parties, and which are not related to the essence of the insured's occupation. Risk management when determining the policy's liability limit is critical . It is a choice that seeks to find the elusive balance point between over-coverage (representing a high and unnecessary premium) and under-coverage, which could leave the insured facing a broken trough on the day of the accident. It is important to emphasize that the main liability limit is that listed in the first chapter, which concerns insurance coverage due to professional negligence, while the second chapter (third parties regardless of the nature of the occupation) does not constitute a "supplementary amount" for cases where the liability limit is missing.
However, it is worth knowing that the insurance company will compensate the insured for reasonable legal expenses for defending against a claim, for an insured event, even above the limits of liability.
By: Miri Levhar, VP, Itzick Simon - the leading construction insurance agency
In most insurance companies, a professional liability policy is divided into two main sections. The first section, whose function is to protect the insured and provide him with coverage against claims for professional negligence, and another section that provides protection and insurance coverage against claims regarding damages caused to third parties, and which are not related to the essence of the insured's occupation.
Risk management when determining the policy's liability limit is critical . It is a choice that seeks to find the elusive balance point between over-coverage (representing a high and unnecessary premium) and under-coverage, which could leave the insured facing a broken trough on the day of the accident.
It is important to emphasize that the main liability limit is that listed in the first chapter, which concerns insurance coverage due to professional negligence, while the second chapter (third parties regardless of the nature of the occupation) does not constitute a "supplementary amount" for cases where the liability limit is missing.
However, it is worth knowing that the insurance company will compensate the insured for reasonable legal expenses for defending against a claim, for an insured event, even above the limits of liability.
Changes in the liability limit over the years
One of the parameters by which the insured can choose one or another liability limit when purchasing or renewing a policy is the type of occupation for which the coverage was purchased and the nature of the risk involved (civil engineering, supervision, geodetic engineering, bridge and tunnel planning, traffic engineering, design, architectural planning for building additions, etc.). This is therefore a liability limit that must be dynamic, since professional activity often requires changes in the level of coverage.
Another parameter for determining other limits is a result of the terms of the tender to which the insured party has access and/or alternatively, a contractual demand higher than the liability limit existing in the policy, also by various work orderers not through a tender.
Insureds often encounter contractual requirements that they (rightly) consider to be excessive and unreasonable. In these situations, although it is possible to negotiate the tender in accordance with the analysis of the project's various risks during the objections submission stage and prior to its closure, it is important to ensure that it is indeed possible and economical to update the liability limit according to the final agreement with the insurance company.
Another parameter that requires thought/examination in relation to increasing the liability limit in the professional liability policy is an increase in revenue turnover and/or an increase in the scope of projects for which the insured is responsible. Needless to say, the liability limit in the policy applies to all of the insured's projects. To the extent that a failure is discovered in one project, the remaining projects "theoretically" become "exposed" projects in terms of insurance coverage.
One of the parameters by which the insured can choose one or another liability limit when purchasing or renewing a policy is the type of occupation for which the coverage was purchased and the nature of the risk involved (civil engineering, supervision, geodetic engineering, bridge and tunnel planning, traffic engineering, design, architectural planning for building additions, etc.). This is therefore a liability limit that must be dynamic, since professional activity often requires changes in the level of coverage.
Another parameter for determining other limits is a result of the terms of the tender to which the insured party has access and/or alternatively, a contractual demand higher than the liability limit existing in the policy, also by various work orderers not through a tender.
Insureds often encounter contractual requirements that they (rightly) consider to be excessive and unreasonable. In these situations, although it is possible to negotiate the tender in accordance with the analysis of the project's various risks during the objections submission stage and prior to its closure, it is important to ensure that it is indeed possible and economical to update the liability limit according to the final agreement with the insurance company.
Another parameter that requires thought/examination in relation to increasing the liability limit in the professional liability policy is an increase in revenue turnover and/or an increase in the scope of projects for which the insured is responsible. Needless to say, the liability limit in the policy applies to all of the insured's projects. To the extent that a failure is discovered in one project, the remaining projects "theoretically" become "exposed" projects in terms of insurance coverage.
The liability limit in the policy encompasses all of the insured's projects, and does not apply separately to each project. For example, if the insured were to receive two different claims, one for 900,000 shekels and the other for 800,000 shekels, and the liability limit purchased is only about 1 million shekels, there is exposure to a self-payment of 700,000 shekels.
Please note that a professional liability insurance policy is a policy based on the "date of filing the claim" , and in professional language "Claims Made" . Claims for professional negligence can be filed even many years after the work.
As far as planners are concerned, the date of the event is not necessarily the date of the accident, but the date of planning. Veteran planners who have accumulated mileage with many projects would be wise to examine the scope of their liability limit from time to time. This is especially true in the case of changing insurance companies and purchasing a policy with different terms through them. In these situations, attention should be paid to the liability limit in the new policy, as well as its applicability with effective retroactive coverage.
Retroactive coverage with appropriate liability limit
Tips for choosing a liability limit in a professional liability policy
- The premium is derived from revenue cycle, liability limit and types of activity – the premium in a professional liability policy is derived mainly from three parameters: revenue cycle, liability limit and type of activity. The higher the revenue cycle and/or liability limit and/or the type of activity is perceived as having a high risk/chance of exposure in filing claims against the insured, the higher the premium will be accordingly. In order to purchase a policy that on the one hand provides a comprehensive insurance solution, but on the other hand does not exceed unnecessary costs, it is important to ensure transparency regarding the real revenue cycle . Preferably in collaboration with the accountant who accompanies the business and who knows how to reach a final and accurate bottom line.
- Pay attention to the areas of practice – the definition of the areas of practice in the policy affects the premium level and the scope of coverage. The areas of practice should be defined, but excessive and unnecessarily broad definitions should be avoided. For example, if the insured is a planner who is not currently required for bridge design projects, which increase the price of the policy by approximately 15%-20%, there is no need to define this area of practice at a fixed level. To the extent that the planner is required in the future for a tender dealing with bridging, he can increase the policy accordingly (see the importance of the dynamic liability limit).
- Maintaining insurance continuity – Since a professional liability insurance policy is a “date of claim” type policy, care must be taken to maintain insurance continuity when switching between insurers, including with regard to appropriate and correct liability limits. An insured who unilaterally stops paying the policy payments, and without extending/renewing the policy, loses all the insurance coverage for which he has paid high premiums over the years. In other words, he contributes his financial investment over the years to the insurance company. Exactly.
- Proper risk management – The liability limit in a professional liability policy is related to proper risk management. When the insured encounters an excessive contractual requirement, it may well be possible to sweeten the pill through negotiation (preferably with the help of a professional insurance agency that will act as a long arm with the insurance company). On the other hand, one should not purchase a liability limit that is too low, "just to have a policy," as an irresponsible liability limit may create unnecessary exposure to independent expenses.
The premium is derived from revenue cycle, liability limit and types of activity – the premium in a professional liability policy is derived mainly from three parameters: revenue cycle, liability limit and type of activity. The higher the revenue cycle and/or liability limit and/or the type of activity is perceived as having a high risk/chance of exposure in filing claims against the insured, the higher the premium will be accordingly. In order to purchase a policy that on the one hand provides a comprehensive insurance solution, but on the other hand does not exceed unnecessary costs, it is important to ensure transparency regarding the real revenue cycle . Preferably in collaboration with the accountant who accompanies the business and who knows how to reach a final and accurate bottom line.
Pay attention to the areas of practice – the definition of the areas of practice in the policy affects the premium level and the scope of coverage. The areas of practice should be defined, but excessive and unnecessarily broad definitions should be avoided. For example, if the insured is a planner who is not currently required for bridge design projects, which increase the price of the policy by approximately 15%-20%, there is no need to define this area of practice at a fixed level. To the extent that the planner is required in the future for a tender dealing with bridging, he can increase the policy accordingly (see the importance of the dynamic liability limit).
Maintaining insurance continuity – Since a professional liability insurance policy is a “date of claim” type policy, care must be taken to maintain insurance continuity when switching between insurers, including with regard to appropriate and correct liability limits. An insured who unilaterally stops paying the policy payments, and without extending/renewing the policy, loses all the insurance coverage for which he has paid high premiums over the years. In other words, he contributes his financial investment over the years to the insurance company. Exactly.
Proper risk management – The liability limit in a professional liability policy is related to proper risk management. When the insured encounters an excessive contractual requirement, it may well be possible to sweeten the pill through negotiation (preferably with the help of a professional insurance agency that will act as a long arm with the insurance company). On the other hand, one should not purchase a liability limit that is too low, "just to have a policy," as an irresponsible liability limit may create unnecessary exposure to independent expenses.
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