Doing The Job Right:

Professional liability claims are usually handled by specialized loss adjusters who have years of experience in general claims adjusting and are familiar with the procedures and practices of the relevant profession. The liability of the professional is rooted in the law of contract. A professional is responsible for performing the duties owed to his or her client as described in the contract, and failure to deliver gives the client the right to bring an action for breach of this contractual obligation. Suits were originally limited to persons having privity of contract.

This position was expanded by the 1964 English case of Hedley Byrne & Co. v. Heller & Partners Ltd The court held that a person with a special skill has a duty of care toward those who rely on the skill. When a third party suffers damage as a result of negligence on the part of a professional, a claim will be allowed even if no contract exists.

Higher standard of care

The ordinary test of negligence is the care exercised by a reasonable person, but professionals are held to a higher standard. They do not have to have the highest possible degree of skill, but they are expected to perform with the skill and care of an average competent, practising member of their field. Professional organizations set standards of conduct for their members. Such guidelines can be helpful in establishing the applicable standard of care within a profession.

A professional will not be held liable for an error in judgment if a competent practitioner would customarily behave likewise in similar circumstances. However, if a professional recommends a course of action that is obviously and plainly wrong, the professional may be found negligent.

Which policy?

Most professional liability policies are unique to the specific professional group being protected. There are a few standard policy forms available, such as the Druggists’ Liability Coverage Rider and the Physicians’, Surgeons’, and Dentists’ Professional Liability Policy; however, insurance is often provided through the association or society that regulates the profession. Unlike most general liability policies, professional liability claims that arise from rendering or failing to render services often relate purely to economic loss rather than to physical damage.

But professionals also require other types of liability insurance, such as a commercial general liability policy that provides premises and operations coverage. When a claim occurs, problems may arise in assessing which policy should cover ambiguous coverage situations. Each case should be reviewed carefully to determine whether two policies might contribute toward the defence costs and indemnity payment.

Strategic choices

A professional liability claim usually involves a claimant making accusations of wrongdoing against the insured. When the claim is for a minor sum such as $200 or $300, the professional may decide to pay personally. (The deductible under a professional liability policy is usually substantial — $1,000 or even $5,000.) In choosing to pay, the professional takes responsibility for minor errors and can be seen to be looking after the best interests of clients. However, any such admission of liability must have the insurer’s prior permission. An admission of liability by the insured without the agreement of the insurer is grounds to deny coverage.

In other cases, professionals may press the loss adjuster to have the insurer defend on principle: admitting negligence too many times can undermine a professional’s credibility. An insurer, on the other hand, views a settlement proposal as a means of closing a file efficiently and effectively. Settlement may be recommended without an admission of negligence.

Taking care of business

In times of economic and corporate turbulence, adjusters may see an increase in claims under directors’ and officers’ liability policies. D&O policies normally have two insuring agreements: one that indemnifies the directors and officers for losses not covered by the corporation and another that reimburses the corporation for indemnifying its directors and officers. Although some policies also provide entity coverage — coverage for the corporation itself when it is named in a lawsuit — many do not, so policy wordings must be examined to determine whether any direct coverage for the corporation is in place.

When both the corporation and the directors are named in a lawsuit, the policy may provide an allocation formula to apportion defence costs if the corporation itself is not insured.

Directors on the hook

Directors and officers can be held personally liable if they do not perform competently, diligently, prudently, and honestly. Federal and provincial business legislation outlines the duties and responsibilities to be followed. The best interests of the corporation must be upheld and balanced against the competing interests of the shareholders.

In assessing liability, the test is whether a prudent person in similar circumstances with comparable knowledge would act the same way. The courts will not second-guess a business decision; the business judgment rule allows directors to make decisions without fear as long as they discharge their duties in good faith and in the best interests of the corporation.

Weighing up a D&O

To investigate a D&O claim, a loss adjuster needs access to various company documents, including

• copies of the company charter and bylaws (describing the mandate and limitations within which directors must operate)

• financial statements and annual reports (providing information about the company)

• minutes of board meetings (if a director recorded disagreement with the activity at the centre of the claim, that director may mount a successful defence)

Directors’ activities must be investigated not only to determine whether liability exists, but also to ensure that no director has engaged in activities that preclude coverage under the policy.

The adjuster may also need the help of experts such as accountants and lawyers to examine highly complex financial manoeuvres and determine their legality.

Although professional liability policies are often sold under a claims-made form, it is not unusual for them to carry a prior acts exclusion: an exclusion for wrongful conduct that took place prior to the inception date of the policy. The adjuster therefore needs to find out the date of the wrongful conduct, when the damage manifested itself, when the company or director first knew that a potential claim existed, and when the director was given notice that action would be taken.

Investigating the investigator

It’s worth remembering that the act of investigating a professional liability claim itself involves professional exposure. The adjuster and the insurer have a duty to properly investigate a claim. Failure to do so can result in a suit against the insurer, the adjuster, or both.

This article is based on excerpts from the study material in the Claims Professional Series of applied courses -a core of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.

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Professional liability insurance applies to a range of roles with an exposure to risk, including:

• Accountants • Undertakers

• Architects • Real estate agents

• Beauticians • Pharmacists

• Dentists • Lawyers

• Doctors • Engineers

• Insurance adjusters, agents and brokers