May 27, 2020

Professional Liability Insurance During a Pandemic: Tell Me You Didn’t Cancel!

Lauren PitonyakBy Lauren Pitonyak

It’s likely government-imposed social distancing has frozen, or at least severely hampered, your ability to bring in new business. Quite possibly you are burning through savings so fast that you’re worried about having nothing left in several weeks or months. You are not alone. Many small businesses are looking hard at their expense budgets to see what they can cut.

Small expense reductions can add up, extending how long you can stay in business with low or no revenue. But as you go through the exercise of reducing expenses, perhaps you paused when you came to your professional liability insurance. Cancelling it could save you hundreds of dollars a year you could put toward office rent or payroll, you may have thought. Hold on. Before you do that, you need to weigh potential cost savings against the disadvantage of being defenseless against client lawsuits. Consider these points.

Cost listing for review and cutsIs professional liability insurance essential?

Many small-business advisers believe it is because it provides cash to cover legal judgments and settlements arising from customer disputes. Without this money, you would have to cover legal expenses yourself, potentially bankrupting your business and putting your personal assets at risk. As an expense, experts suggest putting it in the same category as health insurance — something to keep in force at all costs. Just as health insurance helps you stay personally healthy, professional liability insurance helps your business remain financially stable.

Isn’t a slow business cycle a safe time to be uninsured against legal claims?

There’s never a good time to be uninsured. In fact, now is an especially bad time. With the U.S. economy in a major recession, your customers will be experiencing greater financial stress. Just as you are financially challenged, they may be out of work and burning through savings. When this happens, some desperate actors may target alternative sources of income, namely your professional liability insurance policy. Most won’t do this, but someone with their back against the wall might grasp at any straw to generate cash.

The more serious the financial crisis, the more liability claims small businesses will face. “A rise in disputes typically accompanies an economic downturn,” warns Gerry Pecht, head of dispute resolution and litigation at Norton Rose Fulbright, a global law firm. “If the economy goes sour, more deals may fail, more contracts will fall through, and employees will be laid off.” In this environment, the last thing you should do is jettison insurance coverage.

Would cancelling a policy trigger past liabilities?

Your professional liability insurance policy most likely was issued on a “claims made and reported” basis. This means your policy will protect you when a dispute and resulting insurance claim happen while your policy is active. This also applies to past incidents under prior policies, as long as you have maintained continuous coverage. The minute you cancel your policy, you lose protection against lawsuits from past clients. In effect, you open yourself to lawsuits from potentially any client you’ve ever worked with. You could fix this mistake by reinstating your policy (or buying a new one), but now you’ll need to pay extra for prior-acts coverage. Bottom line: cancelling your professional liability insurance may actually increase insurance costs over the long run.

Does replacing a policy with a cheaper option make sense?

Perhaps you’re considering cancelling your current policy and replacing it with something less expensive. This may involve switching to a lower-rated insurer (with less ability to withstand financial shocks) or to a nonadmitted insurer (which are unregulated by state insurance departments). In the second case, you’ll be dealing with an entity whose benefits, rates, and policy forms aren’t subject to insurance commissioner approval. Nonadmitted coverage is not actually insurance from a legal standpoint, and you won’t find that anywhere in the sales materials or policy documents. Consequently, buying professional liability insurance from a nonadmitted insurer might save you money initially, but could cost you more over the long haul if the firm fails to keep its promises.

Might a reduction in coverage save money?

Another option is to lower your policy limit. By reducing the maximum amount your policy will pay for a covered loss, you might be able to reduce your premium a nominal amount. It’s important to weigh the benefits of a modestly lower cost against the additional risk you’ll face by weakening your safety net.

As you can see, cancelling professional liability insurance has many downsides. It might not save you as much money as you thought, and it will likely create additional legal risks in uncertain times. Being short of cash due to the coronavirus crisis is a serious concern. But weakening your legal protection to save money might be penny-wise and pound-foolish. Revisiting other expenses in your budget may generate comparable savings without exposing you to so much extra risk.

Lauren Pitonyak is an account executive at Gallagher Affinity in Philadelphia. She can be reached at Lauren_Pitonyak@ajg.com. Gallagher Affinity has been offering insurance programs to PICPA members, their families, and employees for over 65 years. Learn more about these offerings.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.