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How Does It Work? - Insurance Coverage

Insurance Coverage – How does it Work?

Navigating the terms of your professional liability coverage can be complicated. There are different types of policies, each with their individual reporting requirements. The following explanation of the various policy types (“Claims-made” vs “occurrence”) and the reporting requirements associated with them, along with other important policy terms should help you navigate the potentially tricky – but very important - topic of insurance coverage.

Fiduciary professional liability insurance is “specialty insurance” that commonly covers “errors and omissions” committed by a Fiduciary. Generally, the policy is obtained in an effort to protect a Fiduciary against claims filed by third parties arising from the fiduciary’s “professional services.” The resulting Fiduciary professional liability policy (“FPL policy”) is generally issued by the insurer following the submission of an application by the potential Insured wherein the potential Insured is required to answer various questions truthfully, as the application is the primary tool used by the insurer in determining whether to afford Fiduciary professional liability coverage to the potential Insured.

If the insurer decides to provide coverage to the fiduciary (generally then referred to as the “Insured”), coverage is usually afforded on a “claims-made” or “claims made and reported” basis, meaning that the claim must be made (and often, reported) during the policy period (typically one year). Although the language may vary, a “claim” is generally defined as a demand received by the Insured for money or services, including the service of a lawsuit.

Most FPL policies provide coverage for claims arising out of negligent acts, errors or omissions committed by the Insured in the course of rendering “professional services.” “Professional services” is defined and generally includes activities performed for others as a fiduciary, guardian, executor or estate administrator, bankruptcy administrator, representative payee, received, agent or attorney in fact, trustee, Daily Money Manager, or Care Manager, bookkeeper. Clearly, most work performed by a fiduciary for a client arising out of a fiduciary-client relationship is deemed “professional services.”

However, it should be noted that Fiduciary generally does not mean an Insured's capacity, nor activities as a lawyer, accountant, property manager, nurse or other health care provider, securities broker, mortgage banker, mortgage broker, independent third party escrow agent, real estate and/or construction advisor, real estate and/or property appraiser, real estate and/or property developer, insurance agent or insurance broker, or activities involving property syndication, real estate investment trusts, limited partnerships or similar investments.

Additionally, activities encountered in the "Ordinary Course of Business" are not reimbursable. In other words, the usual, routine or customary services, practices and procedures of an Assured in rendering Professional Services, including but not limited to the production of, revision or supplement to an accounting, financial statement, invoice or other similar report or document will generally not be covered by insurance.

Most FPL policies also specifically exclude known claims or circumstances that could lead to a claim, fraudulent, criminal or deliberately wrongful acts or omissions, interoffice claims (Insured vs. Insured), claims for reimbursement of professional fees, as well as property damage or bodily injury claims.

The determination of whether a particular claim arises from covered “professional services” under an FPL policy depends upon an analysis of the alleged negligent act, error or omission and whether such conduct constitutes “professional services” pursuant to a plain reading of the policy. The FPL policy is a contractual agreement, generally interpreted as a matter of law by a court.(1) Where an insurance contract is complete, clear and unambiguous on its face, it must be enforced according to the plain meaning of its terms, and extrinsic evidence of the parties’ intent may not be considered.(2) Accordingly, the language in most FPL policies is intentionally drafted to be as unambiguous as possible.

Many insured fiduciaries are often unconcerned with the terms of their FPL policies until there is a “problem.” The average Insured is usually aware only that he or she is insured, but is unable to state even the basic terms of the policy without first reviewing it. At the very least, the Insured should be aware of two very important policy terms that could significantly impact the availability of professional liability coverage in the event of a “problem”: (1) the Insured’s knowledge of a claim prior to the inception of his or her subject policy; and (2) notification by the Insured to the insurer of a claim or potential claim during the lifetime of the policy.

(1) Parks Real Estate Purchasing Group v. St. Paul Fire and Marine Ins. Co., 472 F.3d 33, 42 (2d Cir. 2006).

(2) NFL Enterprises LLC v. Comcast Cable Comm., LLC, 851 N.Y.S.2d 551, 554 (1st Dept. 2008); Graev v. Graev, 46 A.D.3d 445, 450-1, 848 N.Y.S.2d 627 (1st Dept. 2007) (whether contractual term is ambiguous is determined by looking within four corners of document, and not to extrinsic sources).