Professional Liability 101 – Part 2
Common Questions & Answers
Overall:
The following information is offered as general information, it is not intended nor does it replace a thorough understanding of your owncoverage or supersede the actual language of any insurance policy. Also keep in mind that Professional Liability policies are not standard, every onevaries. The terms and definitions presented here can be different from what exactly iscontained ina specific policy.
How much is enough insurance?
You have to look at your practice and determine your greatest probable loss. Most of this will depend onthe sort of business you conduct or the sort ofpeople that you work with. There may also be a requirement either from a regulatory agency or a business whichyou are doing business with that you obtain insurance with specific limits.
Consider thelikelihood of having multiple losses in one year. Depending on your practice you may have frequency as well as severity issues to cover. If you feel thatthere exists a high likelihood of having multiple claims in a year, ensure that your aggregate limit is high enough to cover these multiple occurrences.
What insurance deductible should I purchase?
First look at what you can afford to come up with suddenly. In general the higher the deductible you purchase the lower the insurance cost. Butdue to how insurance carriers give deductible credits, you might find out that going to the next highest deductible just isn’t a financially sound decision. Take the difference in deductibles and divide by the difference in the cost of the deductibles. This will determine your deductible payback.
Here is an example:
Liability Limit Deductible Premium
$100/$300 $5,000 $3,000
$100/$300 $10,000 $2,000
Difference is deductibles: 10,000-5,000=5000
Difference in premium: 3,000-2,000=1000
5000/1000 = 5 Year pay back for deducible
If you think that probability of having a claim in under 5 years is high purchase the lower deductible. If you think maybethat it’s low, purchase the higher deductible.
What are these other (Add-ons) Coverages?
What about Claims Expenses Outside the limits? Typically the reason that you want to obtain claims expenses beyond the limits is to prevent the “Burning” of your liability limit. Professional Liability Insurance defense costs are usuallyincluded in the liability limit, so the more it costs to defend a claim; the less is left to settle the claim. While you are being defended you “burn” through your liability limit.
Understand that Claims Expenses Outside the Limits isn’t an unlimited coverage. It is typicallyrestricted to either your limit of liability or some other sort of lower sub-limit. Commonly Claims Expenses Outside the Limits is capped ata maximum of $1,000,000. In the present insurance market environment this coverage is morechallenging to get. If you areworried about this and do notbelieve your underlying coverage is sufficient, the other option to Claims Expenses Outside the Limits is to buya higher per claim liability limit. What about 1st Dollar Defense or a Loss Only Deductible? Two years ago, companies were giving this coverage away almost free of charge, but now it is getting increasingly difficult to obtainthis particular coverage. This only helps if there are claims expenses (defense costs) only and no indemnity payments. If there is an indemnity payment made you are still liable for the deducible. It typically makes more sense to seeif you’re able to get this coverage if you are carrying a high deducible. Otherwise, if you areuncomfortable with the deductible being carried, see what the cost ofgetting a lower deductible would be.
