Buy the Tail

Architects, engineers and other professionals (including attorneys and accountants) leaving their professional practices or making changes in their forms of business organizations should investigate the impact of their changes on their liability insurance coverage. Most professional liability insurance (also called malpractice or “errors and omissions” insurance) is on a “claims made” basis. The insurance policy in effect at the time a claim is made would cover the loss. The other form of insurance is “occurrence” insurance. Under that policy type the applicable insurance would be the policy in effect when the claimed mal practice may have taken place.

The distinction between “claims made” and “occurrence” insurance coverage is significant. For example, if an engineer accused of malpractice had professional liability insurance in effect at the time of his alleged faulty work but had since retired and no longer maintained insurance coverage when a failure occurred and the claim was made, both the owner and engineer might suffer because of a lack of insurance coverage.

If the engineer was at fault, he might have to dig deep into his own pockets to pay the owner’s damages. If his assets are not sufficient, the owner might have no source from which to recover his damages. The uninsured loss could be catastrophic either way.

Fortunately, there may be a solution to the dilemma. If “occurrence” coverage was unavailable to the professional, extended coverage is necessary.

Most professional liability insurance companies will permit professionals who are retiring or changing their practices to “buy the tails” for their continued protection. Under this arrangement, the insurance carrier agrees, naturally for a premium, to insure the professional involved for an indefinite future period against malpractice claims arising from earlier professional activities.

Professionals in the process of making changes should consult with insurance advisors for the specifics of this type of coverage. They may thus “cover their tails.”

The “claims made” vs. “occurrence” insurance distinction should also be recognized by people in the construction industry generally. Owners often insist that their architects/engineers maintain professional liability insurance while engaged in a particular project. However, they frequently also overlook the fact that with a “claims made” insurance agreement, the professional liability insurance in effect during the design and construction phases would not cover a loss from possible malpractice which may not be discovered or cause problems until well after the construction is completed. For that reason, more long-term insurance coverage arrangement should be considered.

Insurance is one of the most complex areas involved in construction. Owners, contractors, lenders, design professionals and other in the construction industry should have competent advice from a qualified insurance professional, coupled with periodic insurance check-ups.

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