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 Professionals Contractual duty Damages Compensatory Consequential Liquidated Nominal Tort-related duty Contract versus tort actions Professional corporations

Overview of Professional Liability Exposures and Insurance Professional Liability Coverage under CGL Professional health care services exclusion Coverage restricted to: Bodily injury Property damage Personal injury Advertising injury Professional liability exclusion sometimes added

Professional Liability Insurance Common 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, officers Defense coverage Sometimes included in policy limits Sometimes settlement requires insured’s consent Coverage triggers Claims-made common Extended 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 Insurance Policy provisions Insuring agreements Individual coverage Organization coverage Exclusions (varies by policy) High risk medical procedures Criminal acts Sexual misconduct Proprietary activities Punitive damagesDiscrimination PollutionContractual

Physicians Professional Liability Insurance Loss Control - Measures to reduce or eliminate hazards Do not diagnose by phone Do not press for collection of fees if any basis for suit Verify patient identity and operation before surgery Do not admit fault Maintain professional manner and tactful approach Delegate carefully Check medical equipment Maintain accurate records Avoid overly optimistic prognosis Maintain confidentiality Arrange for a qualified substitute

Accountants Professional Liability Insurance Loss 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 Insurance Common 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 Insurance Policy 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 background Liability to shareholders under state incorporation laws Duty of care Make informed decisions Business Judgment Rule Duty of loyalty Ensure 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 suits Derivative – on behalf of corporation Direct actions-on plaintiffs’ behalf Individual 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 covers Losses not indemnified by corporation Indemnified losses paid by corporation Common exclusions Illegal 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 Weiss personally earned $210 million Faces months in prison and $10 million in fines