Specialty Lines Markets
Professional liability: A growing role for retailers
Experts see demand for agent skills as new exposures emerge
By Dave Willis
Tough economic times call for tough—and sometimes unpopular—decisions. And these sometimes lead to lawsuits. “Businesses facing lower revenues need to reduce expenses or find other ways to survive,” explains Tom Herendeen, RPLU, AFSB, vice president of management liability and professional liability at Philadelphia Insurance Companies. “This could cause firms to lay off employees or explore a merger.” Unfortunately, either action could spawn litigation.
“Another professional liability issue businesses face involves data security and privacy,” he adds. “Companies are grappling with how to handle liabilities they have with their use of data, and they're dealing with how to control their social media exposures, how they represent themselves to the public, and how they're protected.”
Paul Romano, president of OneBeacon Professional Insurance, concurs. “The one most significant exposure that has shown itself over the last several years is around network security and data privacy,” he explains. “It's hard to find a business that doesn't conduct transactional activity or other business with a client electronically. This generates a significant risk.”
The professional liability exposure is higher in certain industry segments, Romano points out. “Businesses that have highly sensitive information around personal health or that store client Social Security numbers or other private information are at higher risk.”
Blogging and social media also come to mind. “Businesses that put themselves in this space must be very careful about the constructs they create for that information,” he explains. “There is emerging case law around where liability resides.”
Another important issue is liability assumed under contracts. “Businesses are seeing ever-increasing contractual requirements from their customers,” explains Nancy Cerino, vice president of national independent wholesaler Partners Specialty Group. “Many contracts require that the customer be named as an additional insured, particularly with municipal customers. It can be a challenging and frustrating requirement.”
Many professional liability underwriters believe that the insured is the only one offering professional services and that customers should not be named, Cerino adds. “It can be done in some cases, but it should be addressed contract by contract,” she notes. “Very few underwriters will offer blanket additional insured coverage.”
In addition, she says, some contracts require high liability limits and some require a blanket waiver of subrogation. “These are costly issues in terms of time and money,” Cerino observes.
Marissa McGinnis, professional lines broker at Partners Specialty Group, adds, “We also see requests for dedicated higher limits, which usually requires a project-specific policy. This can be costly too, but if the contract is large enough, it's usually the best way to handle some of the contractual requirements burdening insureds.”
A market in flux
In the midst of a challenging property/casualty marketplace, competition is fierce in many segments of the professional liability underwriting and brokerage arena, according to Michael De Feo, RPLU, ASLI, senior vice president of NIF Pro, the management and professional liability arm of intermediary and program administrator NIF Group. “Miscellaneous professional, specified professions, financial institutions and others are particularly competitive.”
That trend does not encompass all market segments, Cerino observes. “If the 2013 market is similar to this year, it will be spotty by profession. Certain accounts are renewing with no increase unless revenue is up. Other classes, including title agents, lawyers, architects and engineers, and insurance agents, are seeing increases resulting from loss experience in the class.”
“On the West Coast, employment practices liability and management liability continue to be a challenge, in both pricing and coverage,” explains McGinnis. “We are seeing less coverage for more premium. I don't see any positive changes for these coverages in 2013.”
According to Herendeen, “The professional liability market still has plenty of capacity, but it's not at the level it was a few years ago. With many coverages being claims-made, we're starting to see claims coming out of the difficult economy. Carriers that are absorbing more claim activity are tightening up terms and conditions and rates, and they're reluctant to expand into new coverages or territories.”
Romano also has seen fewer new market entrants. “I expect that to be the case in 2013,” he explains. “That's a change from a few years ago. Even as recently 2010 or 2011, new firms were entering certain segments or lines of business. That has slowed, and we may even see carriers begin to withdraw from underperforming segments.”
He finds one segment of the business—network security and privacy—to be vibrant. “It is an interesting frontier,” he explains. “Case law is continuing to emerge, so standards of care are still developing. In the financial institution and health care segments, legal and regulatory standards have existed for some time.”
Emerging case law is driving innovation among carriers, Romano remarks. “Each insurer is interpreting the environment in its own way and developing coverages that are somewhat unique. Over time, coverage language seems to converge, but in this exploratory phase, we're settling in on what the exposures look like and how best to insure them.”
In addition, he says, the inclusion of first-party coverage for network security and data privacy contributes to the vibrancy in this market segment. “More and more clients are interested in services at the point of a breach,” he explains. “This is pressing insurance carriers and their service providers to become even more actively engaged with customers.”
Role for agents
Opportunities abound for retail agents and brokers to build a book of professional liability business. “Find a carrier with a track record and commitment to your insured's or prospect's industry,” advises Herendeen. “The best carriers have a niche focus on certain types of business, so be aware that their products won't necessarily suit the needs of every type of entity that might come along.”
In addition, he says, “Look for policy terms and conditions that fit the customer's needs. Something geared toward a large employer, for example, might not serve a smaller or middle-market client well.”
Herendeen suggests looking beyond niche focus. “Agents and brokers will have an easier time selling if they spend time researching loss control tools and seeing what kind of resources exist. This shows prospects that you've done your homework, and it validates the importance of risk management and preventing losses. It also helps arm agents with knowledge in what is an increasingly complicated marketplace.”
“Be very careful with claims-made issues,” warns Cerino. “Forms differ by carrier, and you must be especially careful that the insured has reported any possible circumstance to its current insurer.” She notes that, while it's worth an agent's time and effort to learn professional liability coverages, using a wholesale partner may be a good option when a producer is less familiar with a certain class of business.
De Feo cites additional factors that contribute to agent and broker success. “The policy is only as good as the broker who negotiates the terms and only as strong as is the relationship between the insured and the producer,” he asserts. “Brokers who do best have experience in the professional liability arena, as well as in the insured's class of business and in claims-made policy mechanisms. Professional intermediaries can add tremendous value in these areas.”
Communication is another success factor, according to De Feo. “For example, it's important to distinguish between a client that needs a quick pricing estimate for contract budgeting purposes and one that needs a bindable quotation with all the endorsements, terms, conditions and subjectivities fully negotiated,” he explains.
De Feo points out that many companies buy professional liability insurance only when they must do so to satisfy a client's contractual requirement. “Agents and brokers can capitalize on this by explaining to prospects that having the coverage in place before they are required to can help that business to stand out from competitors and attract new clients,” he says. “Clients like to hire firms that are ready to do business quickly. This avoids a last-minute scramble that may result in the purchase of a weak or overpriced policy.”
Producers also should explain to clients that a contractual requirement shouldn't be the only reason to secure professional liability insurance. “Coverage is broad, claims occur, and no coverage exists within the traditional P&C insurance program,” De Feo notes. “It's reasonable to presume that any successful professional services firm at some point will need professional liability insurance to satisfy a client. Because coverage typically is written on a claims-made basis, with no retroactive or prior acts coverage in the first year, the earlier the policy is purchased, the earlier the period of retroactive coverage will begin.”
Keeping clients happy
“In a challenging, highly competitive environment, agents and brokers do well to get out ahead of renewals,” explains Herendeen. “We are seeing them reaching out to us, organizing, planning, and identifying key issues to be resolved at renewal. We are actually getting a lot of their clients buttoned up early with very fair renewal terms. Dialogue earlier in the renewal process prevents surprises.”
Communication with clients is equally important, Cerino emphasizes. “Know the coverage issues that are important to that particular account,” she advises. “Does the customer require special endorsements or limits? Get that information up front. Also, remind insureds not to over-estimate their sales. Too much optimism is not a good thing.”
De Feo believes that when clients gain a deeper understanding of professional liability coverages, account retention will increase. “We see a misperception among insureds that if they purchased insurance to cover work performed under a specific contract, they can cancel the coverage once the work is done,” he remarks. “However, if coverage was on a claims-made policy, it must be continued or a tail/extended reporting period must be purchased to cover any claims that may subsequently arise from the work performed. We're starting to see this implied obligation specifically written into contracts.
“Insureds also should be encouraged to purchase a tail if they close down their business,” De Feo adds. “And if they have had a slowdown, they should consider renewing coverage when possible, as they still have the retroactive exposure.”
A renewal may be more cost-effective than a tail purchase, De Feo notes. “If they come back to purchase new coverage after a lapse, they may pay a similar annual rate for less coverage, as they will have lost the right to extend the retroactive coverage back to the date of their first policy,” he explains.
McGinnis encourages agents and brokers to be aware of the changing professional liability marketplace. “Just as some classes are restricting or limiting coverage,” she says, “other classes, such as medical, are offering broader coverage for the same premiums. Agents need to know available 'bells and whistles' and when to ask for them.” This not only helps with retention but also can lead to opportunities with new prospects.
“Agents need to understand what carriers have committed to different professional liability segments, and what capabilities they bring to the table,” Romano points out. “Ask questions about their commitment long term, not just about providing the insurance coverage but to the infrastructure and risk services. The agents and brokers who are most successful in acquiring new business and having the highest retention do a thorough job of matching the carrier to the client's needs.”
Transparency also goes a long way toward holding onto accounts, Romano notes. “Brokers and agents who are doing well in the market facilitate discussion that helps everyone in the insurance placement process understand what issues they are trying to solve,” he says. “That appears to us to be a serious differentiator.”
Cerino stresses the value of risk management tools in bolstering client relationships. “Agents and brokers should encourage insureds to look into these tools,” she says.
The challenge, says Romano, is finding the right match. “Clients need help identifying areas for improvement,” he notes. “This increases their comfort level in using carrier resources. Just piling on services or newsletters or content doesn't help people who haven't yet identified their own risk improvement priorities.”
When it comes to carrier-provided risk management tools, Herendeen encourages agents and brokers to kick the tires and take a test drive. “The agent is typically the one who points the customer to the tools,” he explains. “If they can use some of these risk control tools before they even approach the customer, they're in a better position to sell the overall program.”
New uses of technology, emerging legal trends, and client expectations all are driving an exponential increase in professional liability exposures. Agents and brokers have a vital role to play in guiding insureds toward coverage and risk management solutions that will meet their specific needs.