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PFAC formally launched its newly endorsed professional liability insurance program at the association's annual meeting in May, 2007. This new program is underwritten by Lloyd's of London and is available exclusively to association members. The program has been specifically tailored to the needs of professional fiduciaries.
Generally speaking, professional liability or “E&O” insurance provides coverage for claims arising out of acts, errors or omissions in rendering professional services. The Lloyd's policy form developed for PFAC broadly defines professional services as those rendered in the capacity of a guardian, conservator, executor, receiver, estate, trust or bankruptcy administrator, trustee, representative payee, agent or attorney in fact under a durable power of attorney, care manager or daily money manager.
When considering E&O insurance one very important consideration beyond the basic scope of professional services covered is the extent of prior acts coverage afforded by the policy. With very rare exceptions, for the past several decades E&O insurance has been written exclusively on a claims made rather than an occurrence basis. Your automobile liability policy would be typical example of an occurrence policy form. For instance, if during your policy period you caused a car accident, coverage would be triggered by that occurrence, regardless of when the actual lawsuit was ultimately filed against you.
By contrast, under a claims made policy coverage is not triggered by the accident or wrongful act, error or omission, but rather by the reporting of a claim or potential claim within the policy period. In addition there is, in a sense, an occurrence requirement in that the act, error or omission that gave rise to the claim must have occurred on or after the retroactive or prior acts date of coverage. Normally, this is the date from which the insured has had continuous, uninterrupted claims made coverage.
Unfortunately, many PFAC members have been working as professional fiduciaries for years without E&O coverage – primarily because such insurance has not been readily available in the market place. This poses quite a problem for fiduciaries now desiring to be insured. Because carriers virtually never agree to grant a retroactive date earlier than the date from which the insured has continuously carried uninterrupted claims made coverage, fiduciaries obtaining coverage now may wind up with years of prior professional work left uninsured. This results from the retroactive date being set as the date coverage was first purchased, not when the fiduciary first started in professional practice.
The reasoning behind the industry-wide reluctance of underwriters to insure prior coverage gaps is the perceived moral hazard of allowing insureds to delay purchasing coverage for years until such time as the need for insurance becomes pressing and apparent. Insurers would thus become subject to adverse selection which can significantly skew the actuarial projections underwriters rely upon to maintain financially sound and sustainable insurance programs. In addition, underwriters generally consider professionals who neglect to secure appropriate insurance coverages as lacking in judgment and an appropriate sense of professional responsibility, making such practitioners less desirable as potential insureds.
Notwithstanding the foregoing, the Lloyd's underwriters supporting the PFAC professional liability insurance program have recognized that E&O insurance for professional fiduciaries has not been readily available in the market place. Thus, a fiduciary's failure to secure such coverage is likely not to have resulted from any kind of moral hazard or lack of professional responsibility on the part of the fiduciary, but simply from a dearth of suitable coverage options. Hence, underwriters have expressed a willingness to extend the retroactive date of coverage back to when the insured first started in practice, once the insured has completed at least one year of coverage under the program. This is an unusual, unique and valuable concession on that part of underwriters that essentially runs counter to the prevailing market practice. Nevertheless, it is justifiable given the unique circumstances surrounding the PFAC program.
Please note that underwriter's do envision that this extension will only be available to those who choose to secure coverage during the first year of the PFAC program. Once the program is fully established, the justification for departure from industry standard practices will not longer exist. Further, underwriters have been quite clear that the decision of whether to offer this retroactive date extension will be done on a case by case basis and shall be in the sole discretion of underwriters who will consider such factors as the overall acceptance of the program by association members, as well as the applicant's claims history and risk management practices.
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