Quirks in the PL World – 1/7/10 Knowledge Knugget

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Happy New Year, and Welcome to 2010.  I hope it’s a better year for all of us.

We’ll kick off this year by discussing some quirks in PL placements, which become quickly apparent when an agent or insured expects the same responses from underwriters as they would enjoy from a GL carrier.

For this installment, we’ll review two specific quirks:  Additional Insureds and excess limits.

1.  Additional insureds

As you know, in the world of GL, if you want an Additional Insured added to coverage, you request it, identify the relationship, and you get an endorsement for x amount of money.  The carrier is then willing to notify the AI if coverage ceases and will defend claims against the AI.  Not so in the world of Professional Liability.

It’s rare for there to be Additional Insureds on a PL policy.  There are some exceptions, which I’ll save for a future Knugget.  Here are some reasons carriers will not provide Additional Insured status to Insureds’ clients.

a.  The policy exists to protect the professional — not his clients.
b.  An allegation of professional negligence is needed to trigger coverage, and the client is not the one rendering the covered professional service.  Therefore, tender of a claim against them would not trigger coverage under the insured’s policy.
c.  Defense is within the limits (generally) so providing defense to a third party would erode the insured’s limits.
d.  The Insured v. Insured exclusion in the policy will void coverage for any claim brought against the insured by the AI client.

An outgrowth of this overall reluctance to provide coverage to AIs is further demonstrated by the fact that even those carriers that will add an AI will absolutely decline to comply with an AI’s request to be notified of cancellation of a policy.

2.  Excess limits

In the world of GL, a 4mm xs 1mm limit is available broadly and for pennies on the dollar.  No one thinks twice about it, regardless of the size of the insured or why they want the higher limit.  It’s considered wise to always offer those additional limits to your insured.

In the PL world, carriers are more circumspect about putting up limits.  If you have an insured with, let’s say, 200k, or even 2mm in revenue, and you request a 5mm limit, you will not get it from most carriers.  If you place a 1mm limit, then seek a 4mm xs 1mm, you will likely not have much luck.  Here are some reasons carriers give for not putting up large limits:

a.  PL is a severity line, not a frequency line, so if a claim occurs, it may well exhaust the entire limit
b.  The carrier will not put up limits higher than the insured’s revenue
c.  The carrier will not put up limits higher than the insured’s assets
d.  The carrier cannot get enough rate for the limit
e.  The carrier does not want its policy to be the insured’s biggest asset
f.  There appears to be some correlation between limit availability and loss incurred, so carriers do not want a high limit to be an attraction to plaintiffs.
g.  The carrier will not provide an excess limit higher than the underlyer (i.e., if the primary is 1mm, the most they will put up is 1mm)

Pricing for PL excess limits is much heavier than that of GL.  For example, if a 1mm limit costs $10,000, a 5mm limit is likely to cost $24,000.  (5mm increased limit factors in PL often ranging from 2.30 to 2.45)  The 4mm xs 1mm costs an additional $14,400!   I’ve had agents fall out of their chairs with that kind of pricing because they were expecting a quote for a fraction of the 10k primary premium.  A 5mm xs 5mm limit will range from 40% – 70% of the underlying 5mm, depending on the line of business and the quality of the risk.

This pricing model, again, is largely driven by the fact that PL is a severity line.  In some lines with a tendency to more frequency and a lot of actuarial data, you might see the ratios come down a little.

There are some exceptions to the reluctance to provide higher limits, and in a future Knugget, I will touch on some tricks of the trade to persuading underwriters to put up the limits you need.
Chris Christian, CIC, RPLU
Vice President/Senior Broker
US Risk Brokers

760-415-4213 or for TN agents 615-273-3451

Knowledge Knuggets do not constitute legal advice, nor are they the opinion of US Risk.

Please feel free to suggest future Knowledge Knugget topics.

Visit www.pltidbits.com for archived Knowledge Knuggets and other Important Items regarding professional liability.

chrisc [at] usrisk [dot]com

I am accepting new agent appointments, so please give me a call or send submissions if you feel I can be of assistance with your complex risks.  Or, if you just like working with propellerheads – let’s chat.

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