May 3, 2016
As in life, change in the insurance business is inevitable. That is certainly true looking back over the development of Lawyers’ Professional Liability Insurance in America. In comparison to the beginnings of insurance as a whole which dates back to London in the 1600s, professional liability insurance in America is really just an infant. Its start dates back to 1945. In the six decades that followed, claims under the coverage grew and insurers reshaped the policy as their taste for risk was gradually developed.
Professional liability insurance was first written on an occurrence basis. As long as the services that allegedly resulted in the claim were performed during the time the policy was in force, the policy would respond regardless of when the claim was actually brought against the insured. The Occurrence policy form quickly grew out of fashion with the early providers of professional liability insurance, however, because it became increasingly difficult to adequately price the insurance due to the tremendous delay (lag) in time from when the service occurred and the actual claim was made. Sometimes, that could involve decades. The early actuaries could not adequately predict the rising costs of defense and inflation over time. This led to the introduction of the Claims Made policy form in the 1970’s and eventually the Claims Made and Reported policy type which is predominate today.
The introduction of the Claims Made Policy in professional liability insurance, allowed the insurance companies to close out a given policy year and tally their ultimate losses for the year much more quickly which allowed for rate adjustments (increases usually) to be implemented much more quickly. The reference to a “policy year” is confusing in that it actually means all claims reported from policies written January 1st of a given year until the last policy written December 31st of that year expires twelve months later. To completely close out any given year actually takes 24 months, none-the-less, quite an improvement over the earlier Occurrence policies.
The change from Occurrence to Claims Made in Lawyers’ Professional Liability Insurance really turned the product on it’s head, so to speak. Not surprisingly though, there are numerous other policy changes that occurred under the Claims Made policy to better define the conditions and scope of coverage. Some of the changes broadened coverage under the pressure of competition, but not all!
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Cindy Wiedman, founded Wiedman Insurance Services, LLC (LiabilityPro Insurance Advisors*) August 1, 2014. Cindy is a Registered Professional Liability Underwriter (RPLU) and has designed and administered professional liability insurance programs over a 35-year career working for various insurance administrators in the Midwest such as Shand Morahan & Company, Kirke Van Orsdel, Marsh and Lockton Affinity.
*Currently working with investment advisory businesses domiciled in Iowa, Minnesota, Kansas, Illinois and Nebraska.