Caption Corner Part 4 – The 4 F’s of Insurance

As licensed practitioners, there is no doubt that you should have a professional liability insurance policy to cover you for malpractice, a cyber or data breach insurance policy to insure you for HIPAA violations arising from third party information breach, and a general liability insurance policy covering your office, fire perils, bodily injury, and third party property.

This month we will continue to discuss some of the most important liability insurance terms that you need to know.

In Part 1 published in December 2016, we discussed the following:
Insurance Agent or Insurance Agency; Hazards and Perils; Limits and Sub-limits; and Insurance Claim.

In Part 2 published in January 2017, we discussed the four D’s of insurance:
Declarations; Deductibles; Direct Writer; and Dynamic Risk.

In Part 3 published in this February 2017 issue, we discussed the four E’s of insurance: Endorsements; Exclusions; Effective Date; and Extended Reporting Period.

In Part 4 published in this March 2017 issue, we shall discuss the four F’s of insurance:

• Form
• Fraud
• First-Party Risk
• First-Named

Form

The form, or policy form, is an insurance contract that is between the insurance carrier (insurer) and the insured (policyholder). The policy contract specifies the risks that are shifted from the insured to the insurer.

In exchange for the premium paid by the insured, the insurer promises to pay for the loss (the result of the peril), caused by the stated perils in the policy contract. It is for this reason that the insured must read the actual policy contract and any endorsements to the policy contract for a thorough understanding of the insurance coverage. Do not simply rely on the Declarations page.

In general, courts consider the policy contract together with its endorsements as the operative contract agreement. Insurance contracts are contracts of adhesion. This benefits the insured because the insurer unilaterally writes the contract language and bears the burden for clarity. The insured has virtually no ability to modify the contract terms.

Therefore, ambiguity in the contract language is interpreted in favor of the insured. Also favoring the insured is the fact that insurance contracts are aleatory, and the amounts exchanged between the insured and insurers are not equal.

The coverage benefits usually far outweigh the premium paid. For example, a Preferra Insurance Company RRG professional liability policy may cost $110 in annual premium, but have coverage limits of $1 million and $3 million.

READ YOUR INSURANCE POLICY CONTRACT. You can learn a lot if you compare various competitive insurers’ policy contracts. Many insurance agents fail to disclose the weaknesses in the insurance policies that they sell. Remember that the insurance carriers pay the insurance commissions to the insurance agents to sell the policy to you. The insurance agents work for the insurance carrier, not for you.

Fraud

Fraud is deliberate deceit with the intent to obtain a fraudulent outcome, such as to obtain a benefit, or advantage, or to take property from another.

Main categories of fraud include a false claim, misrepresenting facts and representations, or concealment of material facts made on an insurance application. Depending on the state, punishment for fraud could put the applicant who fraudulently obtained an insurance policy in prison and subject to civil penalties up to or over $15,000.

In Pennsylvania for example, insurance applications are required to state: “Any person who knowingly and with intent to defraud any insurance company, or other person files an application for insurance or statement of claim containing any materially false information or conceals for the purpose of misleading, information concerning any fact material thereto commits a fraudulent insurance act, which is a crime and subjects such person to criminal and civil penalties”.

First Party Risk

A first-party in an insurance contract is the insured. The insurance policy contract is between the first party and the second party, which is the insurer or insurance carrier.

This coverage applies whether the loss is caused by the first-party, or depending on the coverage, a third-party. A third-party is a third person, or somebody other than the insured. The third-party in professional liability policies is usually the client or the client’s family members who filed a complaint in court against the first-party, (insured professional or policyholder), or who files a state licensing board complaint against the professional. Many insurance policies exclude third-party information breaches for example.

Many exclude first-party information breaches as well, but not the Preferra Insurance Company RRG. Few insurance carriers, but not the Preferra Insurance Company RRG, offer cyber liability insurance policies that cover information breach by third-parties such as data warehouse companies and vendors who handle the insured’s records.

First Named

This is a reference to the first-named insured in the insurance policy contract as stated on the Declarations page, who is the individual or entity that is responsible for performing the daily functions of the insured, such as paying the insurance premium and operating the enterprise.

Often times an additional insured is a person or organization that is added to the insurance policy through an endorsement to be covered. Often times, a landlord is named as an additional insured on a professional liability insurance policy. But beware, a professional liability policy is focused on covering professional services arising from therapy and treatment.

It is therefore not the same coverage as general liability coverage. Do not mistakenly believe that naming a landlord as an additional insured on a professional liability insurance policy equals coverage under a general liability insurance policy. You will be uninsured for general liability risk and perils in most cases.

Published March 2017