Elements of Professional Liability Insurance and Management Liability Insurance: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Commercial Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Arthur L. Flitner, Jerome Trupin, and Martin J. Frappoli. Commercial Insurance. (Second Edition). 2007. Chapter 13, pp. 13.12-13.21.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-136-1.

(a) What is the difference between "malpractice" liability and "errors and omissions" liability?

(b) Name four types of insurance that can be considered management liability insurance.

Solution S5-136-1. This problem is based on the discussion in Commercial Insurance, pp. 13.12-13.13.

(a) "Malpractice" liability is liability arising out of occupations where contact with the human body is involved. "Errors and omissions" liability is liability arising out of occupations where contact with the human body is typically not a part of the job. These occupations include engineering, law, accounting, and production of insurance.

(b) The following types of insurance that can be considered management liability insurance (Commercial Insurance, p. 13.13):

1. Directors' and officers' liability insurance
2. Employment practices liability insurance
3. Employee benefits liability insurance
4. Fiduciary liability insurance

Other valid answers may be possible.

Problem S5-136-2.

(a) Do professional or management liability insurance policies typically use an occurrence-based or a claims-made coverage trigger? What is the rationale for the type of coverage trigger being used?

(b) Does a typical professional or management liability insurance policy allow an insurer to settle a claim without the consent of the insured? Why or why not?

(c) In what situations might a duty-to-defend clause in a professional or management liability insurance policy actually be undesirable to the insured?

Solution S5-136-2. This problem is based on the discussion in Commercial Insurance, pp. 13.14-13.16.

(a) Professional or management liability insurance policies typically use a claims-made coverage trigger. This is because many professional liability claims manifest themselves long after the occurrence that gave rise to them (such claims are known to have "long tails"). A claims-made coverage trigger enables the insurer to avoid liability for policies that expired a long time ago.

(b) A typical professional or management liability insurance policy does not allow an insurer to settle a claim without the consent of the insured. The rationale for this is that the reputation of an insured professional might be damaged by such a settlement, and so the consent of that insured professional would give the insured a degree of control over the consequences to his/her reputation.

(c) A duty-to-defend clause in a professional or management liability insurance policy might actually be undesirable to the insured if the insured professionals or managers work for a company that has in-house legal staff on which they would prefer to rely in defending against a claim - or if these companies have established relationships with certain legal firms and are more confident in those firms' ability to defend the professionals or managers in question appropriately. A duty-to-defend clause also gives the insurer control over the defense, including the selection of attorneys, without the insured's consent or even necessarily the insured's input.

Problem S5-136-3.

(a) Name three exclusions that are common to most professional liability insurance policies.

(b) Name two exclusions, in addition to those in part (a) above, that would apply to most physicians' professional liability ("medical malpractice") insurance policies.

(c) Name three types of errors for which a physician might be held liable.

Solution S5-136-3. This question is based on the discussion in Commercial Insurance, pp. 13.17-13.18.

(a) Most professional liability insurance policies exclude coverage for the following (Commercial Insurance, p. 13.17):

1. Contractual liability
2. Punitive damages
3. Dishonest, criminal, or malicious acts of the insured

Other valid answers may also be possible.

(b) The following additional exclusions would apply to most physicians' professional liability ("medical malpractice") insurance policies (Commercial Insurance, p. 13.18):

1. "Liability arising out of hospitals or other enterprises"
2. Obligations arising out of workers' compensation laws and similar laws.

Other valid answers may also be possible.

(c) A physician might be held liable for the following types of medical errors (Commercial Insurance, p. 13.17):

1. Failing to diagnose a disease;
2. Improperly performing a surgical procedure;
3. Failing to warn a patient about hazards a particular treatment might entail;
4. Leaving a foreign object inside a patient after surgery;
5. Administrative errors or omissions associated with medical practice.

Any three of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-136-4.

(a) Name three types of errors and omissions for which an insurance agent or broker might be held liable.

(b) In what cases might there be coverage overlaps between a professional liability policy and a commercial general liability (CGL) policy? What is one possible remedy for such overlaps?

Solution S5-136-4. This problem is based on the discussion in Commercial Insurance, pp. 13.18-13.19.

(a) An insurance agent or broker might be held liable for the following types of errors and omissions (Commercial Insurance, p. 13.18):

1. Giving improper advice regarding a client's insurance needs;
2. Not obtaining insurance for a client in a reasonably prompt fashion after agreeing to do so;
3. Not renewing a policy at expiration and failing to give a notice of nonrenewal to the client;
4. Giving improper advice regarding the limits of coverage the client should obtain;
5. Binding coverage without the insurer's authorization;
6. Not canceling a policy when instructed to do so by the insurer.

Any three of the above suffice as an answer. Other valid answers may also be possible.

(b) There may be coverage overlaps between a professional liability policy and a commercial general liability (CGL) policy when it is not clear whether it is a professional's errors/omissions/malpractice that caused the occurrence, or whether it is defective equipment. The professional liability and CGL insurers may be required to share the damages if it is not sufficiently clear which of these aspects caused the occurrence. To remedy such overlaps, the insured may wish to obtain both CGL and professional liability insurance from the same company, so that coverage for such incidents would not be disputed between two insurers.

Problem S5-136-5.

(a) What are "Side-A Coverage" and "Side-B Coverage" in a typical directors' and officers' liability insurance policy?

(b) List five exclusions that would be found in a typical directors' and officers' liability insurance policy.

Solution S5-136-5. This problem is based on the discussion in Commercial Insurance, pp. 13.20-13.21.

(a) Side-A Coverage is coverage for directors and officers that covers their wrongful acts - including errors, neglect, omissions, misleading statements, and misstatements.

Side-B Coverage is coverage for the sums that the corporation which is being insured would be permitted or required by law to pay as indemnification to its directors and officers for suits that allege wrongful acts.

(b) The following are typically excluded from coverage in directors' and officers' liability insurance policies:

1. Bodily injury liability;
2. Tangible property damage liability;
3. Pollution liability;
4. Libel or slander;
5. Personal profit gained by directors and officers without their being entitled to gain it;
6. Failure to provide or maintain adequate insurance for the company;
7. Deliberate dishonesty;
8. Some violations of the Securities Exchange Act
9. Liability arising out of the Employee Retirement Income Security Act (ERISA) of 1974.

Any five of the above suffice as an answer. Other valid answers may also be possible.

See other sections of The Actuary's Free Study Guide for Exam 5.