August 05, 2014 Articles

The Liability Coverage Most Businesses Need and Have Never Heard Of

An examination of the most common types of this insurance, its uses and abuses, current litigation, and legislative reactions regulating or banning it

by Louis H. Castoria [1]

Businesses that give advice as all or part of their services face a hidden liability risk, one that often is not covered under their standard insurance policies. Miscellaneous professional liability insurance (MPLI) can fill a major gap in organizations’ risk transfer and management programs. But for those outside the “traditional” professions, the learning curve can be a steep one. This article examines some of the common coverage issues that can arise under MPLI policies.

“Find a need and fill it,” advised Ruth Stafford Peale, wife of positive thinking guru Norman Vincent Peale. Entrepreneurs have been doing exactly that for decades—innovating—by identifying niche markets and creating businesses to serve their needs.

MPLI is one of the more recent innovations in the liability insurance industry. It is a fast-growing line of errors and omissions (E&O) insurance, because MPLI recognizes the risk faced by nearly any business that provides advice: the risk of being sued for (allegedly) giving bad advice.

In the “traditional” professions—law, medicine, accounting, and such—exposure to liability for bad advice is a grudgingly accepted fact of life. Doctors who prescribe the wrong medications, attorneys who miscalculate the date the statute of limitations expires, and accountants who recommend that their clients take a dubious position on their tax returns face “advice liability,” as one might call it. Not only the “learned professions” face this risk. The hardware store that offers advice to customers regarding the products it sells is taking a risk in doing so, though weekend home repair customers routinely expect that free service. So are other businesses that offer advice, either as their stock in trade or as a sideline. Think of the tennis coach, the business consultant, and the mortgage broker: A large part of what they all do is offering professional advice. From adoption agencies to undertakers, nearly every business gives advice, either as its primary service or as an adjunct to it.

As one senior industry executive noted:

“From attorneys to dog groomers, professional service providers share something in common: The number of claims targeting them has more than doubled in the past several years. In addition to the increasing number of lawsuits, the number of professional services firms is growing. In fact, in the United States, there are more than 700,000 professional services firms. Small- and mid-size professional services firms account for the majority of those businesses.”[2]

The potential liability risks these businesses face can be different from those that are covered under their existing insurance policies. A broad-form commercial general liability (CGL) insurance policy provides coverage for bodily injury, property damage, personal injury (such as false arrest), and advertising injury, subject to the policy’s terms. The company may also be insured under policies covering liability for employment practices, management E&O, and cyber risks, but those policies are not typically designed to cover advice liability.

Insurers have found a need—a big one—and have entered the market with a variety of MPLI products to fill it. There is a relative dearth of case law to date deciding coverage issues that are unique to MPLI policies as compared with the terabytes of case decisions on CGL coverage. Following is an overview of some common MPLI coverage issues and practical claims-handling scenarios.

In the Beginning . . .

MPLI policies have been around for about 20 years under that name, and much longer if one includes stand-alone E&O policies covering professions such as insurance and real estate brokers, which some insurers now list under their MPLI offerings.

The genealogy of some MPLI policy forms is clear; they bear a close resemblance to the single-profession E&O policies that preceded them. Others started as, or still are, add-ons to CGL, management liability, or other policy forms. For example, corporations often buy “employed lawyers” coverage to protect members of their legal departments against E&O risks that are within the scope of their work.

While some MPLI insurers have developed highly specialized MPLI policies for specific businesses, others use one or a few MPLI forms in which the actual type of business appears only in the declarations page or an endorsement to the policy.

The variety of MPLI policies and the ways carriers approach them are not surprising, as the risks they may be insuring against can be as diverse as that key word, “miscellaneous,” connotes. Typically written on a surplus line basis, MPLI policies seem to be immune from standardization, though there are some common features:

·  Most are written on a claims-made basis, though some that are paired with CGL coverage can be on an occurrence basis.[3]

·  Identifying the professional services that are covered can be the most crucial definition in these policies. For example, a real estate broker’s professional services might, or might not, automatically include the on-site notary public’s attestations to signatures on contracts of sale.

·  This author’s survey of MPLI policies, while not comprehensive, shows that most of them are written with depleting limits of liability, sometimes termed “defense within limits” or “wasting limits.” In other words, the insurer’s expenditures of defense fees and costs reduce the policy limit that would otherwise be available to the insured for settlement or to pay an adverse judgment.

These features give rise to frequent coverage issues in MPLI claims, including those discussed below. The same issues can arise in policies covering the traditional professions, and cases interpreting those E&O policies provide guidance in the MPLI context.

MPLI: A growing Segment of the E&O Insurance Industry

The growth in claims made against MPLI policyholders, as noted earlier, is one reason why MPLI is experiencing growing pains along its path toward becoming a widely accepted risk transfer tool. Another reason is simply that the potential market for MPLI is much larger than the 700,000 self-described professional services firms estimated above.

One leading E&O underwriter put it this way:

Everyone needs a hero, and mine are the miscellaneous professional liability underwriters. I truly believe that they have the toughest job in the professional liability insurance market. My background is medical professional liability and, whether you are underwriting physicians or healthcare facilities, it always seemed that there were pretty standard risk characteristics to look for, not to say that you couldn’t be thrown the occasional curve ball!

But on any given day, a miscellaneous professional liability underwriter may entertain a very wide range of applicants, in very diverse industries and representing professional liability exposures from a wide spectrum of risks. These could range from consultants (a broad category in and of itself), to funeral directors, appraisers, inspectors, and, dare I say it, “professional” tattoo artists. Each of these risks contains its own unique and wide-ranging characteristics, and it is up to the underwriter to adequately assess and price these risks.[4]

Consider some of the businesses for which MPLI policies are available, according to an online search for them along with the phrase “miscellaneous professional liability insurance”: aerial surveyors, anthropologists, aromatherapists, boat registrars, chimney sweeps, comedians, entomologists, film crews, futurists, meeting planners, self-help groups, taxidermists, waste collectors, and zoologists. It does not require a great deal of imagination to come up with a scenario in which any of these businesses might be sued for damages other than those covered under a CGL policy.

Because the potential scope of MPLI policyholders is so varied and vast, there is no way to truly know what the rate of market penetration is or to predict what it will be in 5 or 10 years.

An unscientific survey can readily be done online. Entering in a popular search engine the phrase “[name of profession] professional liability insurance” (including the quotation marks) yielded the following:

            Lawyers[5]                           25,200 results
            Medical                                       41,400 results
            Accountants                               8,780 results
            Architects & Engineers            67,400 results
            Miscellaneous                          103,000 results

It will be interesting to watch the MPLI market develop and to track its growth in comparison with other E&O and employment practices liability insurance (EPLI) products when they were at similar stages of their adolescence.

Specific Policy Terms

In most of the recent judicial decisions construing MPLI policies, the insured businesses are not ones that would quickly come to mind in response to “name a profession.” The courts in the cases cited in this article have not seemed at all surprised to find businesses such as an adoption agency, a manager of an Employee Retirement Income Security Act (ERISA) plan, a marketing agency, or a well-known fast food franchisor, among others, termed “professions.”

Professional services. Underwriting a podiatrist is one thing; underwriting an aromatherapist is another. Podiatrists’ services are well defined by their licensing organizations and overseen by medical quality assurance regulatory systems. There is a wealth of data on podiatric malpractice cases, so claim frequency and severity are known factors.

Meaning no offense to aromatherapists, one doubts that most E&O underwriters have as clear a grasp of the risks attendant to their professional services as they do for podiatrists.

The definition of “professional services” in an MPLI policy becomes the first threshold for coverage. Is it simply the job title, or is it described in greater detail? Vague descriptions of nontraditional services can lead to disputes. In Coral Reef Productions, Inc. v Axis Surplus Insurance Co.,[6] the Michigan Court of Appeals found that the description of professional services, “talent consulting including talent promotion and membership services for others,” was sufficiently ambiguous that it could extend to the insured’s hacking into its client’s customer lists and soliciting the customers. The court noted, “[w]ithout knowing what the ‘membership services’ are, it cannot be concluded that soliciting a client base is automatically excluded from the definition of membership service.” However, the court found that policy exclusions for unfair competition and for “gain, profit or advantage to which any Insured is not legally entitled” were clear and supported the carrier’s denial of coverage.

There can be disconnects between how MPLI policies describe what they cover, how the insureds describe what they do for a living in their insurance applications, and how the insureds’ websites and promotional material describe their businesses. Of course, it isn’t every insured’s goal to have an MPLI policy that covers all the business’s operations. The written communications among the insured/applicant, the broker, and the underwriter can greatly help to clarify what services are in bounds or out of bounds.

Duty to defend. MPLI policies usually impose on the insurer a duty to defend covered claims, though some give the insured the obligation to defend the case, with the insurer indemnifying the insured for “claims expenses,” a defined term that includes attorney fees, costs, and certain other needed outlays for the defense.

Where the duty to defend exists, it can raise unusual issues in the context of a nontraditional profession. For example, the insurer’s defense counsel panel may be adept at defending accountants or design professionals but have no idea what an abattoir[7] does or how to find an expert witness to aid in an abattoir’s defense. If the abattoir is a first-time defendant, it may take some explaining on the carrier’s part to convince the insured that a defense firm with a website that never mentions the word “abattoir” can handle the case.

In adjusting and defending MPLI insureds whose businesses are not household terms, insurers may need to resort to the adjuster’s mantra of decades ago, “A claim is a claim.”

What is a “claim”? Even if “a claim is a claim” for adjusting purposes, it may not be one under the policy’s definition of the word. The customary definition used in claims-made policies, “a demand for money or services, received by the insured,” or words to that effect, may not be expanded to include claims seeking injunctive relief or administrative agency proceedings.

Customer complaints to state or federal licensing agencies and boards can be devastating to a licensed professional’s career. Many E&O policies thus offer some limited coverage to assist such insureds with legal representation, though no damages, as such, are sought. For unregulated businesses, is a customer’s complaint to the Better Business Bureau a claim?

A recent Maryland case[8] dealt with a similar issue, though the insured, a subsidiary of named insured Ascend One Corporation, had received a civil investigative subpoena from the Consumer Protection Division of the Maryland Attorney General, and a similar request from the Texas Attorney General (the “subpoenas,” for simplicity). The subpoenas related to credit counseling services provided to consumers. Under Maryland law, the insured was allowed to submit extrinsic evidence, beyond the so-called four corners of the subpoenas, to prove that its insurer had a duty to defend it in responding to the subpoenas. The policy defined “claim” to include “a civil, administrative or regulatory investigation of any insured commenced by the filing of a notice of charges, investigative order or similar document.”

The insured submitted evidence showing that the subpoenas were intended to investigate the insured’s continuing business activities, and the court agreed that they were “at the very least equivalent to” the filing of an “investigative order or similar document.”

If an insured is subject to a regulatory regimen, coverage for investigative proceedings may be an important feature of MPLI coverage.

Another issue relating to a claim is, as the phrase “claims first made” states, when the claim was made. There are really two related issues involved: (1) Was the claim, or the potential for the circumstance to become a claim, disclosed in the insured’s application for insurance, and (2) when was it first made?

Both issues were addressed in an unpublished New Hampshire federal court case in 2011.[9] A real estate agent had received a letter from the buyers of a house, complaining that the agent had misrepresented the condition of the house and that they would incur substantial structural engineering fees to repair the home. They also asked whether the agent had liability insurance.

One month later, the buyers filed a complaint against the broker with the New Hampshire Real Estate Commission. They later filed a lawsuit against the agent, during the MPLI policy period. Because the first two complaints predated the agent’s application for insurance and the inception date of the resulting policy, the court found the claim not to be covered on both bases.

Insureds with less-regulated businesses than real estate agencies receive letters of complaint from time to time, and may think that they mean nothing until a lawsuit is filed. Au contraire. The agent in the New Hampshire case could have tendered notice of the letter to its prior insurer and preserved coverage under that policy but did not do so.

Claims first made and claims made and reported. As earlier noted, MPLI policies often afford coverage on a “claims first made” basis. If such policies also require that the claim be reported to the insurer during the policy period, they are termed claims-made-and-reported policies. The insuring agreement may read as follows:

We shall pay on your behalf those amounts, in excess of the retention, you are legally obligated to pay as damages resulting from a claim first made against you and reported to us during the policy period or Extended Reporting Period (if applicable) for your wrongful act in rendering or failing to render professional services for others, but only if such wrongful act first occurs on or after the retroactive date and prior to the end of the policy period.

In most states,[10] the distinction between the two related policy forms can be critical. Many states, though not all, require that the insurer establish that it sustained material prejudice due to the insured’s late notice of a claim—“late” often being measured by a standard such as “as soon as practicable.”[11] In contrast, claims-made-and-reported policies contain language that requires notice before the policy expires. Some expressly allow a short “grace period,” such as 30 days, to report a claim, but without covering claims first made within the grace period.

What if two consecutive claims-made-and-reported E&O policies (including MPLI policies) are issued by the same insurer, and the claim is first made during policy year one but is reported during policy year two, though not during the first policy’s 30-day grace period, if there is one? Some states strictly enforce the reporting requirement in the first policy and the first-made requirement in the second policy, leaving the insured without coverage under either policy. Other courts have refused to enforce forfeitures of coverage in this situation.

Related acts/claims. Another common area of dispute involves policy provisions that treat “related claims” (sometimes worded as “multiple claims arising from the same or related acts, errors or omissions,” or similar language) as a single “claim” for coverage purposes, which is deemed to fall within the first policy year in which the earliest of such “related” claims was made.[12]

The Ascend One Corporation case involving the two subpoenas raised this issue. The credit counseling agency had been the subject of an earlier claim brought by four consumers, before either of the state attorneys general commenced their administrative proceedings. The court distinguished the earlier claim from the subpoenas on the basis that the four consumers were alleging illegal practices in the insured’s dealings with them individually, and not as to all consumers.[13]

As new MPLI insureds renew their policies from year to year, the frequency of these issues will increase.

Damages and loss. E&O policies generally cover the insureds’ liability exposure to “damages,” variously defined as settlements, money awards, court costs, and some other pecuniary items, but not injunctive relief, disgorgement, restitution, penalties, fines, fees and commissions, and the like. In most cases, the coverage issue as to “damages” is theoretical because such a high percentage of civil cases settle, and when an actual award of monetary relief occurs, other than in a general verdict, the basis for the award is clearly stated.

Loss is a broader term, encompassing all payments made under the policy, except those made by the insurer on its own behalf, such as to hire coverage counsel. The definition of loss is often the key provision that makes the policy limit deplete as defense fees and costs (claims expenses) are paid by the insurer.

Most first-time professional liability policyholders have no experience with depleting-limits coverage. They may be used to CGL policies, which may be written with depleting limits but more often are not. It can be a rude awakening, turning on its head the patriotic retort “Millions for defense, but not one cent in tribute!”

Exclusions. Exclusions play the same roles in MPLI policies as in others.

In an Ohio case, an ERISA benefit plan manager had failed to segregate various plans’ funds, thus using one plan’s funds to pay another’s obligations (as well as the manager’s overhead). The court looked at the insuring agreements of the MPLI policy at issue and the exclusions. The former terms afforded coverage for “negligent acts,” and the latter eliminated coverage for “intentional, willful . . . or dishonest act or omission by an Insured.” Having found that the manager’s employees had “deliberately—not inadvertently or by mistake”—deposited the plans’ funds into the manager’s main business account, the court found that the MPLI insurer had no duty to defend or indemnify the insured in the case.[14]
           
There are occasional instances in which a standard exclusion effectively vitiates the coverage the insured expected—a policy issued to a pollution remediation company containing the standard “absolute” pollution exclusion, for example, or a securities broker’s E&O policy that excludes the offering for sale of any security. These are scrivener’s errors, which can be corrected by agreement of the parties to the contract or judicially through reformation.

In one recent Texas case, the shoe was on the other foot. An insurer had mistakenly attached an endorsement adding MPLI coverage to a renewal policy, rather than the endorsement that had appeared in the prior policy, excluding professional liability claims. The Fifth Circuit Court of Appeals ruled that although the renewal policy’s language was unambiguous, the insurer was entitled to introduce extrinsic evidence to show that the policy did not correctly state the parties’ mutual intent, which had been to renew on the same terms.[15]

Education Is the Key

To a new MPLI insured, the policy that he or she carefully files away, hoping never to have to use, must seem quite a mystery. Does it cover all my business’s operations? If I have part-time employees, independent contractors, or interns, are they covered if they get sued? If I don’t want to settle a case, can I refuse? What does “defense within limits” mean to me, in practical terms?

There are a lot of questions, and until there is an actual or potential claim to report, there may be no context for the insurer or broker to explain the answers.

One concept, depleting limits, may be the easiest to convey. The MPLI policy is like a bank account. You have X dollars in it, which can only be spent in certain ways—defending the case, settling it, trying to get it thrown out of court, or rolling the dice and taking it to trial. But every dollar spent on any of those choices draws down the bank account, leaving less in the account to protect you if the case is tried and lost.

That simple concept affects many other issues that may arise during the life of a claim. It affects defense strategy, if and when to consider alternative dispute resolution, the costs of electronic discovery, the selection of defense counsel, and, where applicable, the right to independent counsel.

The sale of an MPLI policy should be just the beginning of the learning process. The more insureds know about how their policies work, the better.

Keywords: insurance, coverage, litigation, miscellaneous professional liability insurance, professional services, advice, claims first made, claims made and reported

Louis H. Castoria is with Wilson Elser in San Francisco.


 

[1] Louis H. (Louie) Castoria is a partner in Wilson Elser in San Francisco. His practice centers on professional liability defense and insurance coverage. Louie is chairman of the board of directors of the Insurance Educational Association.
[2] Robert Drohan, “Professional Hiccups = Big Headaches: Why Miscellaneous Professional Liability Presents a Growing Opportunity for Agents,” The Standard, Aug. 23, 2013, at 1.
[3] In one Rhode Island trial court decision construing an occurrence-based MPLI policy, an adoption agency was sued for failing to inform the adoptive parents of the child’s medical and psychological problems. Although the adoption became final before the MPLI policy incepted, the court found that the “bodily injury” coverage under the policy was not limited by the “occurrence,” i.e., the date of the insured’s error, but applied if the bodily injury to the parents, their older daughter, and the adopted daughter took place in part during the policy period. Travelers Indem. Co. v. Children’s Friend & Serv., Inc., 2005 R.I. Super. LEXIS 175 (R.I. Super. Ct. 2005).
[4] Deb Ropelewski, “The New ‘Professions’,” Summit Bus. Media (2011).
[5] To be fair, claims against lawyers and doctors are commonly termed “malpractice,” which is not usually true for MPLI insureds. Substituting “lawyers malpractice insurance” as the search term yielded 14,400 hits, and “medical malpractice insurance” garnered 469,000 hits. Still, the informal survey shows MPLI as having a respectable level of Internet attention as compared with some traditional professions. Comparing the number of in-force policies and premium volume in each category is beyond the scope of this article.
[6] 2012 Mich. App. LEXIS 1149 (unpublished).
[7] A slaughterhouse.
[8] ACE Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789 (D. Md. 2008).
[9] Mut. Real Estate Holdings, LLC v. Houston Cas. Co., 2011 U.S. Dist. LEXIS 100072 (unpublished).
[10] Some states do not follow the “notice-prejudice” rule, including Alabama. Sharp Realty & Mgmt., LLC v. Capitol Specialty Ins. Corp., 2012 U.S. Dist. LEXIS 75353 (N.D. Ala. 2012).
[11] Policies that do not require notice to the insurer “during the policy period” may set other firm deadlines for reporting, which some states strictly enforce. E.g., Wendy’s Int’l, Inc. v. Ill. Union Ins. Co., No. 2:05-cv-803 (S.D. Ohio E. Div. 2007).
[12] E.g., Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal. 4th 854 (1993).
[13] ACE Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789 (D. Md. 2008).
[14] Guyan Int’l, Inc. v. Prof’l Benefits Admrs, Inc., 2013 U.S. Dist. LEXIS 46297 (N.D. Ohio  E. Div. 2013).
[15] Technical Automation Servs. Corp. v. Liberty Surplus Ins. Corp., 673 F.3d 399 (5th Cir. 2012).

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