Liability Insurance: “Tied Selling” or Good Practice?

The pressure is on for professional liability coverage in Canada. While somewhat overlooked in the industry’s focus on bringing directors and officers (D&O) liability under control, errors and omissions (E&O) insurance has undergone a significant hardening after years of persistent under-pricing and heightened claims exposures. It is another long-tail line that is causing headaches in the Canadian property and casualty insurance sector.

Specific lines of professional liability, notably architects and engineers, lawyers, accountants, medical professionals, technology consultants, home inspectors and financial advisors, have been put under the spotlight by underwriters concerned with growing litigation risk. In some cases, insurers have introduced claims-made forms to retroactively exclude losses, denied coverage to accounts with poor claims experience, hiked rates by at least 25%-50% and, perhaps most controversially, forced companies to buy E&O insurance before granting commercial general liability (CGL) policies.

Architects and engineers are the classes of business with arguably the highest profile in terms of claims and loss experience. The leaky condominium fiasco in B.C. was a “wakeup call” for insurers about poor building designs, alerting many carriers to potentially massive exposures. As a result, rates have gone up substantially for architects and engineers in Western Canada and coverage has tightened. Indeed, members of the Association of Professional Engineers, Geologists and Geophysicists of Alberta (APEGGA) have alleged that insurers are engaging in “tied selling”. This has stirred regulator attention.

TIED DEBATE

“Firms have been unable to purchase a CGL policy without first getting professional liability coverage,” confirms David Chalcroft, an engineer and chair of the APEGGA task force looking at insurance issues. “Some firms have chosen not to purchase professional liability in the past and have managed their business accordingly, with high-quality control procedures, targeted clients and clear contracting arrangements. In many cases, these firms have operated for years without professional liability and with no claims history.”

APEGGA has formally registered its complaint about the alleged legality of tied selling practices with Alberta Superintendent of Insurance Arthur Hagan. Chalcroft says the initial reaction from the Alberta regulator was that this looked like tied selling. Hagan says his office is concerned about the practice of tying professional liability as a condition to CGL coverage. “From the examples I have seen, insurance agents are put in a situation where they are telling clients they cannot provide a general liability policy unless clients get E&O coverage,” Hagan says. “The CGL policy specifically excludes E&O, so why is this an issue or a condition? We are concerned when we hear from engineers, or any other group for that matter, and there appears to be a practice of tied selling.” He adds that the regulator wants to hear from all the parties and work on a resolution, but the process is still in the early stages.

The Insurance Bureau of Canada (IBC) has responded by denying any allegations of tied selling. In a letter sent to the Alberta insurance regulator in late September, the bureau notes that most CGL insurers do not provide professional liability coverage, and are therefore not benefiting financially from any insistence on E&O insurance. “It is a specialist coverage, so there is no way this is tied selling,” says Jim Rivait, IBC’s vice president of the Prairies, Northwest Territories and Nunavut.

He argues that insurers are doing the right thing in ensuring that professionals are getting appropriate coverage. “We think it is simply prudence and due diligence on the industry’s part to insist on E&O coverage for designated professionals,” says Rivait. “It’s clear that the courts hold professionals to a higher duty of care, and professionals tend to be a target of litigation. They shouldn’t rely on a coverage that was designed for general liability and doesn’t deal specifically with their profession. We want to make sure they have the proper coverage in place, just like lawyers, accountants and brokers.”

Rivait says “at the end of the day, engineers don’t want to pay for the coverage, but it is still necessary”. He adds that insurers want to cooperate with regulators and engineers, and that one of the simplest solutions may be for engineers to form a group E&O plan through the provincial association.

SELF INSURED

Chalcroft says the APEGGA task force is indeed looking into a self-insurance program as one of many potential strategies to address the current state (or lack of) of insurance coverage. It is working with the Canadian Council of Professional Engineers on potential solutions that could be either provincial or national in character. “This is an issue that affects all engineers in Canada,” he says. (MGA Encon Insurance Managers Inc. provides a group professional liability plan to the Association of Consulting Engineers of Canada.)

But, Chalcroft acknowledges that E&O coverage is “10 to 20 times as expensive” as general liability and a factor in the current discussions about insurance. That said, he points out that the issue at stake is about more than just costs. “We think firms should be able to decide how they want to pursue their business and whether they feel there is a need for professional liability insurance.” As such, he notes that insurance can sometimes have the reverse effect of attracting claims, particularly for litigious third-parties who know how to get settlements.

TWO POLICIES

Hagan says that the Superintendent’s office is “not alleging that general liability companies are selling E&O insurance, but we are concerned about why insurers are asking for it to be in place when it is specifically excluded.”

Michel Yip, a managing director of Encon Insurance Managers, says the issue of exclusions in the CGL policy is not quite that clear-cut. “Coverages for the two policies are not the same, but they do overlap in some instances,” he adds. “In terms of exclusions, some CGL policies do exclude it and some do not.”

Yip says that, historically, there has been some “blurring of the lines” between CGL and E&O policies. “About 20 years ago, a lot of what we call ‘soft’ E&O lines of business were covered if you bought a CGL policy,” he explains. “There was an understanding that if you filed a claim, it would be covered. The problem was that it became hard to tell if it was an E&O or CGL claim. In some cases, the exposures had increased, especially in the manufacturing and construction sectors. It forced the marketplace to separate the cover. Right now, if there is a hint of E&O in anything, CGL insurers will either exclude it or ask the client to get E&O insurance.”

Yip says that engineers are just one of several problematic lines for E&O markets. Lawyers are another area, even though the Law Society of Upper Canada has a self-insured program for members, known as “LawPro”. The plan, however, only provides limits of $1 million, and “many of the large firms need to buy insurance well beyond that”, says Yip. Similarly, many of the “big five” accounting firms have opted for self-insured mechanisms such as captives, which Yip says have been almost tapped out by claims resulting from well-publicized financial scandals. And, even with captives, accounting firms still rely on insurance for back-end protection, Yip observes.

MANDATED LIMITS

Other areas of concern are true medical malpractice (such as doctors), soft medical malpractice (such as dental hygienists), home inspectors, technology consultants who work onsite at companies or organizations, and financial/investment advisors. Yip says a public that is quick to assign blame and initiate lawsuits has resulted in larger and more frequent damage awards – and significant defense costs for insurers.

To compound the problem, regulations in certain provinces have mandated specific E&O limits for certain kinds of professionals, especially financial planner s and investment advisors. “The E&O market has been severely under-priced over the last 12-15 years, probably by as much as 50%,” Yip notes. “Insurers were running loss ratios over 100% and relying on investment income to offset the underwriting losses. Many have [now] looked at the technical results and said, ‘this is not a line we want to be in.'”

With diminished capacity, underwriters “tend to be picky and they are willing to walk away from the business,” Yip says. “We have either tightened up or reduced what we write in certain lines of business, such as architects and engineers in B.C. We have also stopped writing home inspectors and restricted writing mutual fund dealers and financial advisors.”

In a comment that could apply to engineers, as much as lawyers or accountants or any other profession under siege by a rash of litigation, Yip remarks, “there are some risks that, even with risk management and appropriate rate increases, insurers still can’t earn enough to make a profit”.