Finance 431:Property-Liability Insurance

Lecture 18:Professional Liability

Professional Liability Insurance

Overview of Exposure and Insurance

Physicians Professional Liability Insurance

Accountants Professional Liability Insurance

Directors and Officers Liability Insurance

Overview of Professional Liability Exposures and Insurance

Duties of ProfessionalsContractual duty

Damages CompensatoryConsequentialLiquidatedNominal

Tort-related dutyContract versus tort actionsProfessional corporations

Overview of Professional Liability Exposures and Insurance

Professional Liability Coverage under CGLProfessional health care services exclusionCoverage restricted to:

Bodily injuryProperty damagePersonal injuryAdvertising injury

Professional liability exclusion sometimes added

Professional Liability InsuranceCommon Characteristics

Most coverage written by specialized insurers

Covered acts and consequences

Differs from business exposure

Coverage depends on profession

Medical - injury

Accountants, attorneys - financial harm

Errors and omissions coverage - negligence

Common Characteristics (cont)Who is covered

Professionals, partners, owners, officersDefense coverage

Sometimes included in policy limitsSometimes settlement requires insured’s consent

Coverage triggersClaims-made commonExtended reporting period is not guaranteed and not unlimited

Coverage territory

Physicians Professional Liability Insurance(also known as Medical Malpractice)

Loss exposure

Legal standards - negligence

Standard of care

Locality rule

Specialists and duty of referral

Delegation

Diligence and abandonment

Informed consent

Physicians Professional Liability Insurance

Common allegations

Surgical error

Improper diagnosis

Improper tests

Lack of informed consent

Use and administration of anesthetics or drugs

Physicians Professional Liability Insurance

Defenses

Statute of limitations

Good Samaritan statutes

Contributory negligence

Informed consent

Physicians Professional Liability InsurancePolicy provisions

Insuring agreements

Individual coverage

Organization coverage

Exclusions (varies by policy)

High risk medical procedures

Criminal acts

Sexual misconduct

Proprietary activities

Punitive damages Discrimination

Pollution Contractual

Physicians Professional Liability InsuranceLoss Control - Measures to reduce or eliminate hazards

Do not diagnose by phoneDo not press for collection of fees if any basis for suitVerify patient identity and operation before surgeryDo not admit faultMaintain professional manner and tactful approachDelegate carefullyCheck medical equipmentMaintain accurate recordsAvoid overly optimistic prognosisMaintain confidentialityArrange for a qualified substitute

Accountants Professional Liability InsuranceLoss exposure

Breach of contract

Improper or incomplete performance

Tort liability

Failure to perform with reasonable professional

care and competence

Statutory liability

Securities laws

ERISA

Accountants Professional Liability InsuranceCommon allegations against accountants

Tax services

Audit services

Accounting services

Client counterclaims (when suing to collect fees)

Failure to detect embezzlement

Securities laws

Business and investment advice

Breach of fiduciary duties

Management advisory services

Accountants Professional Liability InsurancePolicy provisions

Insuring agreement

Professional services

Defense costs usually within policy limits

Who is insured

Named insured, officers, directors, partners,

stockholders and employees for professional

services

Heirs, executors, administrators and legal

representatives

Accountants Professional Liability Insurance

Exclusions that may apply

Bodily injury or property damage

Dishonest or criminal acts

Defense against these charges covered

Innocent insureds held liable for dishonest acts of another are covered

Punitive damages

Contractual liability

Example – Accounting Office

Ned Numbers owns and runs a small accounting firm with the following policies:

Building and Personal Property

Commercial General Liability

Workers Compensation

Accountants Professional Liability

For each of the following incidents, indicate which policy would apply.

A client waiting for an appointment with Ned burns himself on hot coffee Ned’s receptionist served.

A) Building and Personal Property

B) Commercial General Liability

C) Workers Compensation

D) Accountants Professional Liability

E) None of the above

Ned develops eyestrain from reading so much fine print at work and needs to buy eyeglasses.

A) Building and Personal Property

B) Commercial General Liability

C) Workers Compensation

D) Accountants Professional Liability

E) None of the above

One of Ned’s clients is fined by the IRS when Ned misses a tax filing deadline.

A) Building and Personal Property

B) Commercial General Liability

C) Workers Compensation

D) Accountants Professional Liability

E) None of the above

One of Ned’s assistants releases the tax forms of one of his clients to a newspaper, which prevents the client from winning a local government contract.

A) Building and Personal Property

B) Commercial General Liability

C) Workers Compensation

D) Accountants Professional Liability

E) None of the above

One of Ned’s assistants is injured trying to put out a fire at work.

A) Building and Personal Property

B) Commercial General Liability

C) Workers Compensation

D) Accountants Professional Liability

E) None of the above

The fire described in the prior question damages the firm’s computer system and destroys the tax records of hundreds of clients.

A) Building and Personal Property

B) Commercial General Liability

C) Workers Compensation

D) Accountants Professional Liability

E) None of the above

Directors and Officers Liability

Legal backgroundLiability to shareholders under state incorporation

lawsDuty of care

Make informed decisions

Business Judgment Rule

Duty of loyaltyEnsure decisions are in the best interests of all shareholders

when a conflict exists

Legal Background - Continued

Liability to shareholders under securities laws ( federal and state)Disclose material information in timely manner

Types of suitsDerivative – on behalf of corporation

Direct actions-on plaintiffs’ behalfIndividual

Class

Directors and Officers Liability –Indemnification

Indemnification–D & Os can be reimbursed by corporations for•Legal costs

•Settlements

•Judgments

•Fines

Problem – What if corporation is bankrupt?

Directors and Officers Liability –Insurance

D& O insurance coversLosses not indemnified by corporation

Indemnified losses paid by corporation

Common exclusionsIllegal personal profit

Willful misconduct

Directors and Officers Liability –Class Action Suits

• Incentives to settle securities class actions

• Merit of securities class actions

Latest Conviction of Tort Lawyer

• Melvyn Weiss – Shareholder Class Action King• On March 20, 2008 he agreed to plead guilty to

participating in a criminal conspiracy• He provided improper kickbacks to clients of Milberg

Weiss LLP• Clients were hired to serve as name plaintiffs which

allowed Milberg Weiss to be the lead counsel and earn larger fees

• He lied to judges that all clients were treated equally• 1983-2005 Weiss personally earned $210 million• Faces 18-33 months in prison and $10 million in fines