SPECIALTY LINES MARKETS
Addressing professional liability exposures
Agents & brokers need to understand emerging risks that impact professionals
By Dave Willis
This year, professional liability insurance market conditions seem to vary by, well, profession. Bill Yurek, area president for specialty wholesaler RPS/AVRECO, says the medical malpractice market continues to be very soft. "Pricing remains the same as 2010 or is declining," he says. Claims frequency is low, he adds, but severity continues to rise.
"In 2011, the medical malpractice insurance line is expected to achieve its sixth straight year of underwriting profit," Yurek says. "Underwriting profitability like this has never been seen before."
Jeanne Braun, executive vice president-Hospitals and Special Programs at Physicians' Reciprocal Insurers, also sees strong competition in medical lines. "The E&S market, which used to limit itself to writing high-risk doctors and unusual risks, is competing directly with the admitted markets and, in many cases, charging far less," she says. "This is a disturbing new trend being fueled by a soft market with too much capacity." That said, Braun adds, "Nationally, claims and losses seem to be relatively stable."
Clients are exploring captive arrangements as a logical outgrowth of their risk management programs, she says, noting that her firm supports such arrangements and provides wrap-around services. "A captive can be a wonderful vehicle for doctor groups and health care systems that aggressively manage patient outcomes and prefer to take on some risk," Braun notes.
Risk retention groups (RRGs) and risk purchasing groups (RPGs) also are active in medical professional liability markets, she says. "While these groups may enjoy some growth due to their competitive pricing models, their greater challenge will be sustaining and surviving repeated, expensive malpractice claims from aggressive plaintiffs and their attorneys year after year."
Such groups are subject to federal rather than state oversight, which Braun calls, "a blessing and a curse. State regulators impose many restrictions on how business is written and priced, but they also offer policyholder protections that RRGs and RPGs cannot. Guarantee pools don't cover non-admitted companies or RRGs/RPGs; clients should understand this."
Not all lines are as competitive as medical. According to Bernie Geis, president of H&W Insurance Services, "Many classes of business we write are experiencing rate increases." Geis, whose underwriting management firm offers most lines of professional liability insurance, notes that, in addition to higher rates, some clients are "seeing some changes in policy terms."
Dan Reed, JD, CPCU, second vice president-Professional Liability in Travelers' Bond & Financial Products operation, has observed a modest increase in claim frequency for some lines. "Certain types of professional services firms—real estate agents, title agents and real estate legal practices—have been more exposed to the economic downturn," he explains. "All of these have seen a somewhat higher claim frequency.
"There's generally a claim-lag between when services are provided and claims develop," he adds. "This is causing claims to come to fruition now for work done a year or two ago."
He says some firms are changing how they handle professional liability insurance and risk management. "The continuing difficult economy is causing some professionals to look more closely at costs and overhead," he observes. "Too often, they're looking for ways to save money on insurance. Unfortunately, it's happening at the same time we're seeing some non-traditional exposures emerge."
These new exposures are driven, in large part, by technology advances. "Today, it's much easier for professionals to store and transfer information electronically," Reed explains. "One risk, of course, is cyber liability." A traditional professional liability or E&O policy may not address such exposures if they're not closely related to the professional's discipline, he notes.
"For instance, network breaches can occur, client records or files can be lost or stolen, and professionals could share computer viruses with clients, either through their Web site or, perhaps, in a holiday greeting or other e-mails they send," he notes. "These may occur in the context of a law firm's or accountant's business service, but some carriers may argue that they don't fall under their definition of professional services.
"The professional liability forms, the way they're traditionally written, may not be broad enough to cover the exposures," he adds, "so there is a potential coverage gap. Cyber liability coverage can fill the gap and make sure that firm is covered if one of these events occurs and damages a client or third party."
This is true in the medical arena. "Myriad new laws and regulations at the state and federal level have fed these new exposures," Yurek says. "Healthcare clients need to think through their potential liability. An excellent example is data breach. Patient records accidentally released on the Internet are a very serious matter because of the amount of private information stored in these records. The liability, fines and reputational damage are all daunting."
Reed, too, sees reputational harm as a challenge. "The transfer of information today is much quicker than it used to be, and there are many more media outlets," he explains. "This means there are more opportunities for information—good or bad—to be disseminated broadly and quickly." Negative fallout from a story could harm a firm's financial position or its ability to adequately serve clients.
"Many professionals are not capable of handling the response on their own," he adds. "Crisis event coverage, which is specifically designed to address situations like this, could offer professionals access to public relations help when such events occur. But it's something that's not universally included in a professional liability policy."
Another emerging risk involves discovery. "Many more records are stored electronically and are accessible in ways they weren't before," Reed points out. "Professionals now face situations where they may be on the receiving end of a subpoena for cases where they have no potential liability. Traditional professional liability policies generally respond only when a claim or potential claim is made against the insured."
For example, an accountant may be asked to produce client information in a divorce proceeding. "A business owner may be involved in a divorce and, while the accountant is not a named party in the litigation, the tax and other accounting records may be subpoenaed," Reed adds. "Here you have no hint that anyone is accusing the accountant of doing anything wrong, but he still has to respond."
Deciding what to produce can be troublesome. "When you get a discovery request that asks for all records for a client, it's difficult to know which records to turn over and which are inappropriate to share," he says. "Some of the work is subject to work product or other privilege. The accountant needs professional, legal advice. Subpoena response coverage, which now is included on a number of professional forms, could cover the expense of such counsel."
Reed says agents and brokers can serve clients and prospects well by understanding and sharing information on new exposures. "Of course, that doesn't mean ignore the core risks," he adds. "The majority of reported matters involve traditional E&O—someone making a mistake when providing professional services to a client. Pay attention to these as well."
Geis concurs. "Agents and brokers need to understand their insureds' businesses, as well as market trends, conditions and other issues," he says. "If their agent does not monitor his or her customers' business already, it's time to start doing so. In particular, agents need to look for increases or changes in client exposure.
"Agents should not count on their customers to recognize or notify them of these changes," Geis adds. "It's important to keep a finger on the pulse of the insureds' business. Then agents need to tap internal expertise—or that of their carrier or other insurance partner—and respond appropriately."
Today's economy makes that counsel especially important. "Tough economic conditions have led some professional firms to expand into new areas," observes Reed. "When they do this, their existing coverage may not be adequate or appropriate."
Braun emphasizes keeping up on broader marketplace changes. "The healthcare paradigm is shifting," she says. "With sweeping changes in healthcare and reimbursement models, doctors and hospitals want partnerships that will help them survive and grow. Brokers and agents interested in healthcare can offer cost-effective solutions and help clients and prospects address new exposures—including HIPAA violations and electronic medical record-related errors."
Yurek believes healthcare provides hidden opportunities—and significant income potential. "Healthcare represents about 15% of our economy today, and it's growing," he says. "It's not just hospitals or physicians. Perhaps the strongest growth is in outpatient services and non-traditional healthcare delivery, including nurse staffing agencies, physical therapy clinics, correctional medicine and more."
Some companies delivering these services are large and national in scope, Yurek adds, but many are locally-owned firms in need of proper coverage. "The local agent or broker probably already knows owners in their own communities," he says.
Yurek believes agents need to capitalize on carrier partnerships. "We combine our expertise with our agents' and brokers' local knowledge and influence to turn prospects into customers," he says. "We like making our retail agents and brokers look good and feel confident about what many see as a rather intimidating line of insurance."
According to Reed, agents and brokers should encourage clients to make use of expanded risk management services carriers are offering. "Some firms now provide help lines, where professional firms can get answers to questions not directly related to a claim or potential claim," he explains. "In addition to providing coverage counsel, agents and brokers can add value by offering—and encouraging clients to use—these new resources. They're paying for it; they might as well use it."
Braun believes agents and brokers need to deliver value throughout the policy period. "The days of speaking with clients once a year, near renewal time, should be abolished," she says. "Brokers are supposed to be full service partners—on par with accountants and attorneys—and should want to consult when clients make important decisions."
Such relationships can drive mid-policy adjustments, but they also lay the foundation for renewal discussions. "Knowing the insureds' issues and concerns helps agents and brokers as they conduct coverage check-ups," says Reed. "It helps as they make sure coverage is adequate to meet the exposures."
Geis agrees. "Agents and brokers are able to deliver extra protection for clients," he says, "and at the same time, they often increase their revenue. It's important to always look for opportunities for cross-selling."
"Rounding out accounts has always been an excellent way for retail agents and brokers to improve their positions with clients," adds Yurek. "There are always companion coverages that should be offered along with traditional professional liability insurance."