Originally Posted By: jferry
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Justin -
The question is not whether to insure or not insure your errors and omissions liability exposure but rather whether to transfer this risk to an insurance company or shoulder the risk yourself. The risk/exposure is the same, only the method of handling it is different.
Sophisticated businesses engage in elaborate cost-benefit analyses to ascertain whether or not to transfer risk or retain it. We do it ourselves on a much smaller scale. For instance, I never take the physical damage insurance on a rental car because it is preposterously expensive in relationship to the risk being transferred. In a rental car, your liability exposure for damage to the rental car is generally limited to the $500 deductible that the rental car company has on its physical damage insurance but the rental car company charges something like $15/day to eliminate this exposure. That translates into an annual premium of over $5,400 [$15 x 365] to insure a $500 exposure, an absurd tradeoff. Similarly, I carry a $1,000 deductible on my collision coverage because it saves me approximately $200 a year over a $500 deductible, an excellent tradeoff.
I look at insurance as a method of financing the inevitable losses that stem from being in business rather than as insurance. What I mean can be illustrated by auto insurance. If you drive long enough, you are eventually going to be involved in an automobile accident or accidents. Over, say, a thirty year period, you might pay an average of $3000/year for automobile insurance coverage or approximately $90,000. Investment returns on that might double or even triple the amount available to respond to claims. But one or two accidents in thirty years, could equal or exceed that amount. So the theory of insurance is that your exposure, even being careful, under this scenario is approximately $200,000 and a couple of claims totaling $200,000 would cause a major dislocation to your budget but a payment of $250/month to an insurance company is doable to eliminate that potential shock to your budget.
In a professional liability context, claims are even more likely because the consumer is looking to the professional to protect his interests. He knows nothing about houses and is seeking to protect himself from making what could be a very costly mistake. The only reason our industry exists is to manage the risks associated with the purchase of a house. Our members perform on the average 1.5 inspections a day, say 300 to 400 per year. That?s a lot of exposure and mistakes do happen and in our profession, those mistakes can be very costly.
When things go wrong in a house purchase, the purchaser has all sorts of folks to go after to try to rectify the situation: the seller, the listing agent, the selling agent, the broker, the purchaser?s agent, the purchaser?s broker and the home inspector. Even if the purchaser does not blame you, but, say, blames the listing agent, you can be certain that the lawyers defending other parties in the lawsuit are going to bring you into it. Similarly, if only you are sued, your lawyer will be sure to look to the other parties for contribution and indemnification.
The good news is that most professional liability lawsuits result in the vindication of the professional. Most, not all. And that is because professionals are by and large good at what they do and are generally not negligent. Generally. Again, mistakes do happen. So, in the vast majority of cases that a professional is likely to be involved in, no damages will be awarded. The problem is that it often results in a Pyrrhic victory. You win the case but your costs to defend yourself are enormous.
If you are not insured, you will have to hire your own lawyer to defend your interests and you will have virtually no control of costs. The more litigants - the seller, his broker, his listing agent, the buyer?s broker and agent - the costlier it will be. Each of those parties will be maneuvering to limit his own exposure by taking depositions and other kinds of discovery to shift the blame to someone else. Then the Court will get involved ordering various and sundry conferences that your lawyer will have to attend: scheduling conferences, settlement conferences, pre-trial conferences, hearings on motions and on and on. Eventually, it will become a question of whether you pay your lawyer or pay the plaintiff to go away. And maybe the plaintiff will be willing to go away but you still have the other parties who have filed cross-claims against you and each other. You have to make them go away, too. For a litigant, litigation is a major headache because it is seemingly never over. Even after verdict, it is not over. There are post-trial motions and oral arguments and possibly appeals. So, even if you win, you lose.
Then there are the suits that you lose because you were negligent and your negligence was the proximate cause of a very large loss. That?s when the real nightmare begins. And you will probably be ruined as a professional, if you are unable to respond to a legitimate claim. And, believe me, you are not going to want to be in the position of telling your client, "I've got great news. I'm going to give you all your money back."
So from someone who has been in the legal trenches, litigating all kinds of claims, representing both plaintiffs and defendants, and who knows first hand how preposterously expensive even minor litigation can be, I think that your professional liability exposure is one that you would want to transfer to an insurer. And, as a professional, you really owe it to your client to protect him from your inadvertent mistakes.
I would manage the premium costs by choosing higher deductibles because the premium savings justifies the additional exposure.
Keep in mind that the deductible applies only to damages not to defense costs.
Finally, a word about the NACHI insurance program through the agency of Towers Perrin. I was involved in the development of this program for our membership. Towers Perrin did a truly wonderful job of securing this program and negotiating its generous discounts for our membership. In chapter meeting after chapter meeting at which I have spoken, members have, across the board, lavishly praised the program and have advised me that it is much less expensive that the competitive products on the market.
We spent a lot of time in securing this market for our members and it is very important that the membership support the program. There is strength in numbers and the more this program is embraced by our membership, the greater our leverage will be with Lexington Insurance Company on such issues as coverage and premium rates and claims issues.
The program is currently available in seventeen states and will be expanding to all fifty states on January 1, 2006.
I hope that answers your question. If not, give me a shout at
legal@nachi.org
Joe