Like most insurance policies, professional liability insurance will typically include a deductible or self insured retention. As with other forms of insurance, higher deductibles will result in lower premiums. A typical deductible will apply to both “defense” and “damages.” Damages are defined as the amount a company is found to be liable or at fault. Defense costs are the legal fees associated with defending a claim. When a claim is frivolous and/or the firm is found to be not at fault, these defense costs are typically the only expenses associated with the claim. Often times it is an option to offer First Dollar Defense, which means that there is no deductible for defense costs. This option may cost approximately 3-5 percent extra in annual premium, but can pay off immediately in the case of a claim.
One complaint that I often hear about insurance is that insurance companies would rather just “pay off” a claimant instead of fighting it. As a business owner, if you know that your service was not flawed, you may decide to fight it regardless of the cost to defend. This concept is addressed in an insurance policy often called a Hammer Clause. This is how it works in an example:
Your firm is brought into a suit where the claimant is demanding a $20,000 reward. The insurance company feels that it would be cheaper to just have this claim “go away,” so they offer the claimant $10,000 to settle the claim. You feel your firm did not do anything wrong, and you want the insurance company to fight the claim to protect your reputation. With a Hammer Clause, if you are found liable or expense costs go out of hand, you are responsible for anything over the initial offer to settle of $10,000. Many insurance companies can offer either a “softened hammer” or no Hammer Clause at all.
Whether you want to fight the claim to protect your firm’s reputation or because you feel morally obligated to do so, it is important to understand how your insurance policy will respond. Look to your trusted advisor to explain these and other important distinctions in how your current policy is structured and will respond.
Tony Johnson is an Accredited Advisor in Insurance and can be reached at Davidson Insurance, 360.514.9550 or Tony@Davidsoninsurance.com.