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Why Full Tort coverage is crucial for Advisers.

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One of the first  professional liability insurance policies was written for a CPA in the late 1930s following the decision in Ultramares Corporation v. Touche, 174 N.E. 441 (1932).  Coverage was basic – limiting the risks insured to claims made by clients arising from negligence acts.  In fact, the doctrine of negligence arose from the Scottish law case of Donoghue vStevenson when in 1932 a manufacturer left a snail in a bottle of ginger beer.

Negligence claims arise from the careless acts, errors or omissions in the performance of professional services by Advisers to clients.   Since those early days, the risks faced by Advisers have expanded beyond purely negligence acts, to encompass a broad range of allegations made by aggrieved clients.

A malpractice lawsuit against an Adviser often includes allegations of intentional acts, including, but not limited to, breach of contract or duty, error, misstatement, misleading statement, acts, or omissions.  Creative plaintiff attorneys bring suits against Advisers making as many allegations of wrongdoing as is reasonably possible – negligence is only one of the “heads” of damages.  Consequently, an Adviser’s attorney will have to file a defense that responds to ALL the allegations made in the suit.

Examples of Intentional Torts

  • Assault.
  • Battery.
  • False imprisonment.
  • Conversion (i.e. Theft).
  • Intentional infliction of emotional distress.
  • Fraud/deceit.
  • Trespass (to land and property)
  • Defamation
  • Tortuous interference

The following flowchart illustrates the dimensions of tort liability:

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But what about malpractice insurance coverage?  After all, the insurer is going to be paying for the cost of defending the lawsuit.  The quality of defense provides depends upon the extent of coverage.  Claims adjusters often use a principle called “allocation” which simply means that the insurer will only pay for defense of a covered claim, but not the ancillary allegations.  This creates an uninsured exposure for and Adviser.

So if you purchased a errors and omissions policy that limits coverage to negligent acts – or your policy includes an exclusion for intentional acts – then part of a malpractice claim may not be covered. Of course, insurers have a duty to defend policyholders – and may provide for the cost of counsel up until a final adjudication – but ultimately an insurer will send you a bill for the uninsured portion of the claim.

Of course, policies can be endorsed and modified, but it is very unusual to change the fundamental basis of coverage via endorsement.  However, if available, request an endorsement to change the policy to full tort coverage.

Check your policy.  You will find the clause relating to whether your policy is limited to negligent acts in the preamble of the policy or the definition of covered or wrongful acts.  Get it removed if you can.  It could save you thousands of dollars in uninsured claims.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance.

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Rickard Jorgensen, FCII, ARM, ACIArb is the founder and President of Jorgensen & Company, a risk management consultant and professional risk specialist.  Since 1999, Jorgensen & Company has developed and managed specialty insurance programs for CPAs, lawyers and Investment Professionals.

Contact Rickard at: rjorgensen@jorgensenandcompany.com or 201 (345) 2440.