Understanding the Risks of Coverage Lapses
Insurance provides options to safeguard our possessions, businesses, professional pursuits, and lives. These options are designed to protect us during times when we are at our most vulnerable. Unfortunately, failure to maintain continuous coverage remains among the most elected options. With professional liability insurance, also known as errors and omissions, lapsation of coverage could have catastrophic financial and legal implications.
Insurance Lapse
There are several ways a lapse can occur. An insurance policy expires, and premiums are not paid to renew it. The policy is canceled and is not replaced or renewed. Missed premium payments, failure to provide necessary documentation to maintain continuous coverage, intentional decisions to operate without insurance, or just an oversight are some examples of why policies fall into a lapse. What most professionals are unaware of is just one day of an insurance policy lapse counts as not maintaining coverage.
Financial Exposure
Professionals are particularly vulnerable because their professional liability insurance policy is most likely a “claims-made and reported policy” meaning it only covers claims filed for services performed and incidents or claims reported while the policy is active. The moment an insurance policy falls into a lapse, professionals will start losing protection against claims arising from their services performed while the policy was in force. Specifics vary from policy to policy. Not having an active insurance policy in place, a person or business would incur the entire cost of any legal defense and potential settlements or judgments. For example, a firm has missed payment on their professional liability policy in error and their policy has lapsed. After the policy lapses, a client has brought to light a major error in the design of a building that would cost $100,000 to fix. Because the claim was filed after the policy had lapsed, no coverage would be provided. Though the mistake was made while the policy was active, the firm would have to pay costs to correct the design and implement the fix because the policy was not active when the claim was reported.
Legal Implications
Financial loss is just the start of the ramifications of an insurance lapse. The ripple effects reach all aspects of a person’s business or profession. Reputation damage, contract violations, and state licensing complaints are just a few examples of legal issues that could arise. Failure to maintain continuous insurance is more likely viewed as being irresponsible. Contracts could be breached, which could lead to legal action and/or termination of agreements. In professions which require licensing, in some states, a lapse could result in license suspension or revocation, forcing professionals to cease practice until coverage is reinstated.
The harsh reality is any lapse in coverage, whether lasting one day or several months has long term implications. A business will more than likely see an increase in premiums upon obtaining new coverage or reinstatement. Coverage could be declined by some carriers. Most of all, any claims arising from prior work performed during the time when you did have an active claims-made policy in force would most likely not be covered.
Prevention
Taking action to prevent insurance lapses is crucial to any professional or business. Should financial hardship occur, contact your carrier to see if there are payment options and or coverage options that could lower your premium. See if there are any discounts that could qualify you for a reduced premium. The core lesson for professionals is to prioritize insurance and treat it as essential as maintaining your professional license. It’s not an area any firm or professional can afford to be relaxed in.