Surviving in the Liability Jungle
By Bayard Bigelow III MBA CPA
In response to the question “What is it about your practice that keeps you awake at night?,” a CFP I spoke with recently replied, ”Nothing. That’s what I have insurance for.” A more accurate answer — for this particular professional — would probably have been, “That’s what I have expensive insurance for.” The better answer is, “I don’t stay awake at night because my firm scrupulously avoids high-risk situations.”
Certainly insurance offers security. But it’s no substitute for practicing defensively. And using insurance as your only safety net misses the point — dealing with a claim is typically a major drain on both emotional and financial resources to any practitioner.
Unfortunately, ways of doing business that professionals regarded as “safe” 15 years ago are, in many cases, no longer safe. Society has changed the nature of the practice. The rate of litigation, the willingness to sue and the size of awards have grown exponentially, causing insurance companies to withdraw from the professional liability markets or raise rates exponentially. Indeed, in 1986, the shrinkage of available financial capacity to provide insurance for several of the professions created the “liability crisis” we have heard so much about. Extraordinary increases in the cost of insurance, in turn, caused those who could not pass on cost increases of this magnitude to practice without insurance.
Increased regulation of the financial planning profession, imposed from within or from without, is often cited as the solution for stemming the erosion of confidence in the financial planning profession. With the infamy surrounding the more well publicized breaches of professional conduct, all professionals feel the reverberations. It is no accident that the ICFP has, for the first time in its history, actively supported the promulgation of professional standards. Yet the number of voices supporting self-regulation as an alternative to government regulation continues to grow. Self-regulation is a vastly preferable alternative to government regulation. But if self-regulation is to work, it means not only adherence to the growing number of professional standards, it also means that each practitioner must manage his or her practice with the utmost degree of professional care and follow procedures that have been proven to avoid losses. This is true because, once the profession has adopted a set of standards of professional conduct, plaintiffs will now possess established standards of professional care against which to litigate.
It is more critical today than ever before that the operating fundamentals that contribute to running a safe practice be part of your mindset as you go about managing a business. We call this concept “loss revention” or “risk management” in the insurance business. And we believe that, by looking at the nature of past claims against accountants, we can come up with increasingly better ways for practitioners to protect themselves.
Who’s Suing? Not surprisingly there are certain types of activities that attract more claims than others. In general, these are the types of activities that have the potential to cost the client a large percentage of his or her resources. For example, a sizable corporation that looses $5,000 in its investment accounts is unlikely to sue the financial planner for not identifying the problem. An individual client who losses $5,000 very well may.
As the leading carrier providing E&O coverage for financial planners, our loss information spans some ten years of coverage. It is highly informative about the types of losses that practitioners experience, as well as those that are potentially severe.
Claims Experience. Our claims experience, which spans two carriers, is highly informative, but must be viewed with at least two caveats. These are that the experience is not statistically credible, both because of the number of claims and because of their lack of maturity; and, that the experience of carrier may not be the same as the policyholders’ experience because of contractually imposed limitations on coverage. Nevertheless, the claims experience is a very strong indicator of where the land mines are.
Message # 1 – Defense Costs Are The
Hidden Cost Of Settling Claims. Nearly all professional liability insurance policies will cover the costs of both defending and settling a claim. We therefore need to look at the costs of defending the professional, across all claims.