Speaking the Language of Professional Liability

By Eric Bruhn from

We get a lot of calls from clients who are worried there’s something wrong with their professional liability insurance.

“Do I have informal investigation coverage,” they ask tensely. “Is my policy manuscripted?” “What about coverage for routine SEC Examinations?”

Inevitably, it turns out they read an article or heard a generic phrase that raised doubts about their current policies. Insurance is a rapidly evolving business, and it’s always smart to check periodically to make sure you have the coverage you need at the best price. That’s especially true for the policies that protect your company and its directors and officers from the cost of regulatory investigations, lawsuits and other professional liability claims.

Unfortunately, a cloud of buzzwords often makes it confusing and more difficult for a client to understand what aspects of their policies are most important and what coverage they need.

That’s why my advice to clients is as clear as it is consistent: whenever you come across something that sounds like it is important to add to your policy, keep asking questions until you get clear answers about a) what’s being proposed; b) how it’s different than what you already have; c) what the risks are; d) how much it will cost; and e) is it in the best interest of my organization?

What follows are three examples of the most common buzzwords we get asked about and what they really refer to. We’ve prepared some key questions to ask when considering changes to your professional liability coverage, along with a breakdown of what you need to know.

“Informal Investigation Coverage”

Behind the buzzword:
It can be expensive to comply with all the requests from federal and state regulators asking for information, especially if no wrongdoing is alleged. Increasingly, insurance is available that covers some of those costs.

Key questions:

  • What specific costs does this policy cover?
  • What must happen to trigger reimbursement?
  • How is it different from the coverage we have?

What you need to know:
Your professional liability insurance already covers the cost to your firm or its employees of dealing with a formal government or regulatory investigation. But it doesn’t cover routine SEC examinations and is widely considered the cost of doing business by insurers. The problem is that there is a large gray area in which regulators ask questions or request information without saying what, if anything, they are actually investigating.

The definition of what insurance companies will cover has expanded in recent years, largely because the financial institutions insurance market has pushed for these changes. So now most policies cover the costs of informal investigations even if there isn’t a specific allegation of wrongdoing. In other words, you may never have seen a document that says “informal investigation coverage,” but if you have an experienced broker you probably already have it.

“Manuscript Policies”

Behind the buzzword:
A manuscript insurance policy is a contract written specifically for a particular client. It typically has more advantageous terms and is easier to read than a standardized policy form amended by endorsements.

Key questions:

  • How material are the differences between my protection under the manuscript policy and the standard approach?
  • Does the manuscript policy carry any additional risks?
  • How much extra will this cost me?
  • How does this affect my deductible?

What you need to know:
It can sound appealing to have your insurance written just for your company, but this approach could create several problems. By not using a policy form approved by state regulators, you are probably not going to be covered by the state guarantee fund in the event your insurer becomes insolvent. And in cases of a dispute over ambiguous language, the law gives the benefit of the doubt to the party that did not draft the contract. That means you could be in better shape using the standard policy written by an insurance company than one you’ve written yourself.

The other concern is cost. You’ll pay more for a manuscript policy than one with nearly identical coverage on standard forms and it could come with a higher deductible. (If you’re based anywhere other than New York, you’ll likely have to pay an additional 2%-5% on top of that in surplus taxes and fees.)

Though usually more expensive, manuscript policies can be advantageous depending on an organization’s individualized needs. Some of our clients are comfortable paying higher premiums for broadened coverage that manuscript policies can provide, while other clients prefer using standard policies with carefully crafted endorsements that offer broad protection at a lower price. Insurance is a risk transfer product and the pros and cons should be considered in order to make an educated decision specific to your firm’s risk tolerance.

“Judgments, Settlements & Legal Expenses”

Behind the buzzword:
Very rarely is a professional liability claim black and white. In many circumstances, there are portions of a claim that are intended to be covered and portions that are not covered or have caveats to the coverage. An example of this is the term “judgments, settlements & legal expenses”, which appears frequently in insurance policy language and can often be vague in its application. Most notably, a policyholder must refer to the definitions of “loss” and “defense costs” to understand what is likely to be covered under their policy.

Key questions:

  • What do the definitions of Loss and Defense Costs include? What is excluded?
  • What scenarios would this apply to my company?
  • What other policy provisions or exclusions could affect or restrict this coverage?
  • Will our limits be negatively impacted or prematurely exhausted?

What you need to know:
In the defense, settlement or judgment of a claim, coverage could be impacted by various factors specific to that claim. Retaining an experienced attorney is the first step to protecting the firm’s brand; however, retaining top securities attorneys can often be costly. It’s important to get consent to your law firm of choice and their hourly billing rates upfront in order to ensure that you are getting the most out of your insurance contract. Additionally, the definition of loss precludes coverage for taxes. However, coverage could be available for tax liability imposed on a customer or client due to your actions. There may also be coverage for fines & penalties in one scenario (civil violations of Foreign Corrupt Practices Act, for example) but precluded in another scenario (fines imposed by the SEC for securities violations, for example).

Disgorgement is another item that is frequently noted in headlines, and for good reason, as it often involves large sums. From an insurance perspective, disgorgement is not usually defined and leaves many insureds unsure of how their policy would respond to a resulting judgment or settlement. An experienced broker can evaluate your policy and clarify what is likely to be covered for your organization.

As exemplified above, insurance buzzwords can often cause unnecessary confusion and anxiety about insurance coverage. When faced with insurance jargon, it’s important to ask detailed questions and even more critical to find a broker who can explain these terms in a way that you can understand. You may find the buzzwords being used refer to coverage you don’t need or in fact, already have.

Eric Bruhn is associate director and product leader of the financial institutions group in Crystal & Company’s New York office.

Contact Us