Avoid Lapses in Your Professional Liability Coverage

It’s important to maintain continuous professional liability coverage because most policies are written on a “claims-made” basis. This means coverage is triggered when the claim is made.

Whether you opened your accounting business ten years ago or just last month, there were a lot of decisions to make along the way.

The decision to purchase professional liability insurance is one that should not be revisited.

It’s important to maintain continuous professional liability coverage because most policies are written on what is called a “claims-made” basis. This means coverage is triggered when the claim is made, not when the negligent acts, errors or omissions occur.

Under a “claims-made” policy, you may receive coverage for occurrences prior to the policy period. However, in order to take full advantage of this policy feature, often referred to as “prior acts coverage,” coverage should be maintained continuously without interruption.

To illustrate the concept of claims-made coverage, consider this example:

An accounting firm purchases an Accountants Professional Liability policy on June 1, 2010, and the insurance company establishes that date as the Retroactive Date on the policy (also called a “Prior Acts Date” on some policies). Every year the firm renews the policy, the Retroactive Date remains the same, so the Prior Acts Coverage period is essentially increasing.

So, for example, in the policy term June 1, 2016-June 1, 2017, coverage will apply to claims made against the insured firm in that policy period for any negligent acts, errors, or omissions that occurred any time after the Retroactive Date of June 1, 2010.

Once the policy is in place, it’s important for several reasons to complete applications and provide requested information in a timely manner when applying for renewal coverage.

First, it is standard practice with insurance carriers to require that completed applications and other information necessary to renew a professional liability policy be received well before the renewal expiration date of the policy. This allows the carrier time to evaluate the information submitted and provide a renewal quote stipulating the terms of the renewal offer before coverage expires.

In addition, it allows your agent the time to review the quote and coverage contracts to ensure that you are getting the best possible coverage at the most competitive price.

Second, each carrier has different requirements regarding accepting late applications and stipulations to consider backdating coverage. Your agent may or may not be able to obtain a quote after the renewal expiration date on the policy has passed and coverage has expired.

Finally, if coverage is not maintained, what is often referred to as a “gap in coverage” can occur. Consider this next example:

An accounting firm purchases an Accountants Professional Liability policy on June 1, 2010, and the insurance company establishes that date as the Retroactive Date on the policy. The firm renews the policy with the June 1, 2023 Retroactive Date for three years, after which time the firm lets the policy lapse as of June 1, 2014.

After a year’s time, on June 1, 2015, the firm reapplies for coverage. Even though the firm has been providing professional accounting services since the first policy was purchased on June 1, 2010, the firm must now start with a new Retroactive Date of June 1, 2015.

Fortunately, there are quick and easy ways to maintain your professional liability coverage without interruption, and your agent is your best resource:

• Need a little reminder? Sign up for automatic reminders.
• Tend to procrastinate? Take advantage of the lead time provided to you when you receive the renewal packet.
• Have questions about the application? Ask for assistance.
• Have there been changes at your firm? Talk with your agent.
• Need options to pay the premium? Ask what payment plans your carrier offers.

Keep in mind that your agent is your best advocate when it comes to working with insurance carriers to get you the most competitive quotes and a quality insurance policy.

Insurance carriers do consider timely completion and submission of applications and other information an indication of the overall quality and insurability of an accounting firm. Delays in completing and submitting applications for either a new policy or a renewal policy may result in the need for additional paperwork and either slow or stop the process of ensuring you get a quality policy at the best possible price.

Once you receive your renewal quotation, it is equally important to review it, and advise your agent to bind coverage by the policy expiration date, to ensure that your coverage remains safely in place.

So, keep making good decisions by working with your insurance agent to avoid lapses in your Accountants Professional Liability Coverage.

Don’t Risk It: File a Claim in a Timely Manner

You get sued by a disgruntled client. (Trust us, it happens.) You plan to fight the complaint in court. What’s your next step after contacting your lawyer?

If your answer was to reach out to your insurer that provides professional liability coverage, pat yourself on the back. Although notifying the insurance company about a potential claim seems like a logical step in this scenario, not all policyholders follow through.

And oftentimes, that will be a problem that could leave you stuck with a possible liability bill.

Last year, the New Jersey Supreme Court upheld a lower court ruling that said an insurer could deny coverage if a claim wasn’t made promptly, or “as soon as practicable.” In this particular case, the policyholder was obligated to notify the insurer as soon as practicable or at least within 30 days of a lawsuit being filed against the insured. The policyholder did not alert the insurance company with a filing of a claim until six months into the legal proceeding, prompting the insurer to deny coverage.

That behavior by the insurer was acceptable, according to the higher court, because the policyholder was covered by a claims-made policy, which means the incident and the claim must be made during the policy period. In this case, the policy went even further, stipulating that the claim must be made as soon as practicable or within 30 days. Even though the policyholder notified the insurance company while still being covered, it was still too late, according to New Jersey’s high court.

This ruling was in a state court and thus applies only to business done in New Jersey. However, it just makes good sense to notify your liability insurer as soon as possible upon being sued. Then there are no worries about whether you acted in a timely manner.

You can find more details on this particular court case here.

About the Authors

Ronda Jones is a Property & Casualty Business Coordinator for Forrest T. Jones & Company (FTJ) which administers NSA’s member insurance program. She has 30 years’ experience working in professional/E&O coverage lines as an underwriter, broker and in claims administration for a law firm. She has worked with products geared specifically for accountants for 15 years while at FTJ.
Randy Heaster writes about insurance and financial services for Forrest T. Jones & Company. Randy has written about business and consumer issues for more than 20 years.