Professional firms, such as law firms and accounting firms,require special attention when placing their executive perilscoverages, including employment practices liability and directorsand officers liability insurance.

Often agents place these important coverages as if their clientswere manufacturers, retailers or other similar commercial risks.Professional firms, however, have numerous exposures that areunique to the service industry and require coverages to match theexposures.

Fordecades, EPLI, D&O insurance, errors and omissions insurance,and crime policies have been designed for traditionalcorporations–and the definitions and other clauses are tailored tocompanies that are incorporated.

Professional firms, however, can often be organized as limitedliability corporations (LLCs), general partnerships (GPs) orlimited partnerships (LPs). Accountants, law firms and even someinsurance brokers are switching to these structures from “S” or “C”corporations (the letters refer to subchapters of the InternalRevenue Code).

Professional firms may change to one of these structures toalter their tax status and maximize their profits, but some firmsmay also make the change to minimize liability of individuals. (Thepartners of unincorporated general partnerships, for example, allshare equally in liability for legal actions brought against thepartnership.)

EPLI policies often insure the directors, officers and the legalentity. Although some policies include “employee” language, it isbest to redefine the definition to specifically include“partners.”

Sometimes the definition needs to be even broader to includegeneral partners as well as limited partners. When doing this, onemust be careful not to hinder the coverage by broadening theinsured definition so much that it actually heightens theexclusionary wording in the “insured-versus-insured exclusion.

Each case is different and often requires a unique approach.

When evaluating coverage for partnership firms in EPLplacements, be sure to address the scenario in which a protectedclass is passed over for partnership. The number of EPL claims forfailure to make partner based on gender and race has substantiallyincreased over the last five-plus years. As you can imagine, thesetypes of claims are expensive and effect the reputations of theinsureds.

The allegations may be similar to those that would be broughtagainst a standard commercial insured, such as sexual harassment,wrongful termination and discrimination (based on age, sex, race,disability, etc.) But we can assure you that when accountants,attorneys and other similar professionals bring litigation, it isvery expensive and often catastrophic. Often these claims have theadded disadvantage of a seasoned plaintiff.

Executives at professional firms are seen as large targets withdeep pockets. Sometimes under pressure they underestimate theeffect of their actions.

Anotherexample of a specific EPL coverage enhancement that agents shouldaddress for their professional firm clients is “third-party”coverage.

We often see proposals or discussions of third-party coverage.However, it is frequently unclear if the proposal is seeking tocover the situation where a third party enters the insured'sworkplace and commits an act such as sexual harassment, forexample.

Is the third-party coverage intended to cover the situationwhere a delivery person harasses the receptionist on a drop off? Ordoes the third-party endorsement cover the insured's people whenworking off site, maybe during an off-site audit at the accountingfirm's client?

These are all important questions to be addressed when placingEPLI coverage for professional firms.

BEYOND EPLI

When considering D&O insurance for partnerships, agents needto keep in mind that partners are often sitting on their clients'boards or other outside boards.

A master policy for all partners who sit on other boards–be itpublic, private and not-for-profit boards–would provide the benefitof extra protection through a policy tailored to their uniqueexposures. Do not think that placing a traditional D&O policyon a law, accounting or other professional firm is truly addressingall their needs, and most important protecting the partners whenthey serve in these other capacities.

Turning to fidelity and crime coverages, we note that most ISOforms (developed by the Insurance Services Office) do notspecifically provide coverage for fraud and dishonesty ofpartners.

This might not be seen as a real threat in a small firm, but asthe number of partners grows and they spread to numerous locations,the need for partner coverage increases.

Also often overlooked are the funds being held in escrow atprofessional firms. Can you imagine if the clients' funds in theinsured's trust account were compromised?

Often the magnitude of just the loss of client funds, let alonethe insured's assets will cause a firm to close.

We often review insurance polices for escrow agents that are notaddressing their “trust” exposure. Lawyers, accountants, insuranceagents and other professionals are no different.

PRIVACY ISSUES

In addition to unique EPLI exposures of partnerships andunforeseen management liability risks, professional firms havelarge and potentially devastating exposure to breaches of privacy,yet many have no recognition of the necessity of this insurancecoverage.

Professional firms that are not purchasing privacy insurancecoverage may just not know it is available. Still, it is hard tothink of a professional firm that has not accumulated an abundanceof “personal data” as defined by the laws of 44 states and federallaw as well.

For other types of commercial firms, mega-claims like breachesdisclosed by organizations that regularly handle personal data,like ChoicePoint and CardSystems (a credit card processor), andeven retailers like Hannaford (a supermarket chain involved in a2008 computer systems' breach exposing more than four millioncredit card numbers) have already shown the need for thiscoverage.

Although cyber liability insurance has been around since thelate 1990s, it has been only the last 18-to-24 months that theinsurance industry has enhanced and focused on the privacyperils.

The insurance market for privacy coverage today is similar tothe EPLI market of the early 1990s, when EPLI was first introduced.It is an exciting but confusing time to many. Each insurancecompany offering this coverage is taking a different approach andhas its own policy language.

The basic coverage triggers, however, can be summarized asfollows:

o A failure of your network security protections

o A failure to protect or wrongful disclosure of private orconfidential information

o A failure to protect personally identifiable information (PII)from misuse or theft

o A violation of any federal, state or local privacy statutealleged in connection with the failure to protect PII

The costs associated with privacy breaches are not onlyfirst-party costs, but also third-party damages, which are ofteneven greater than first-party expenses. Class-action lawsuits havebeen and continue to be frequent consequences of privacybreaches.

Coverage provided by a comprehensive privacy policy wouldinclude, but not be limited to coverage for:

o Third-party damages and legal claims

o Fines and penalties imposed by federal, state and localgovernments

o Expenses incurred in notifying customers of a breach, and thecost of mitigating reputational damage done

o Defense costs within policy limits

o Expenses incurred repairing or cleaning up the breach

o Fines levied by banks and credit card companies due to aprivacy breach

When insuring a professional firm, an example of an issue thatneeds to be considered to ensure the broadest coverage is obtainedis the question of whether the scope of coverage includes all“leaks” or just unauthorized breaches.

The attorney or accountant that leaves his or her laptop atTransportation Security Administration at JFK airport or LAX mightneed the coverage, but that activity might not fall within thescope of an unauthorized breach.

Costs associated with complying with each state's requirementsand fulfilling the breach notification requirements of the 44states that have passed privacy laws range from $55 to $206 foreach client, according to numerous industry experts. (Editor'sNote: For example, Ponemon Institute, a Traverse City, Mich.-basedprivacy and information management firm, said that direct costs percustomer were $50 in 2008 and total costs were $202 per customer,rising to $204 per compromised customer in 2009.)

Unless the professional firm is a young firm, the number of pastand present clients can easily run into the tens of thousands.

Privacy claims are expensive, and if not addressed quickly,correctly and fairly can destroy a professional services firm whosereputation is built mainly on trust.

When seeking coverage for professional firms it is important tounderstand their special needs and match those needs with the bestinsurance products available. Although sometimes challenging, it isimportant for agents and brokers to recognize this as anopportunity to differentiate themselves from competitors and tobring their clients the value-added protection they rightfullydeserve.

Peter R. Taffae is managing director ofExecutive Perils, a Los Angeles-based national wholesaler solelydedicated to D&O, E&O, EPL, digital, intellectual property,media, legal malpractice, insurance agents E&O, crime andfiduciary liability insurance. He can be reached at [email protected].