In 2017, Insurance Services Office, Inc. (ISO), introduced a new miscellaneous professional liability (MPL) insurance program. This article examines the new program and endorsements after first providing an overview of MPL insurance, its history, and its development over the past several decades.
Until the mid-1970s, the only professional liability policies that existed were those written for "traditional professionals," such as doctors, lawyers, accountants, and architects/engineers. At that time, stand-alone liability policies covering the professional liability exposures of "nontraditional professions" did not exist. Instead, consultants, funeral directors, advertising agencies, printers, travel agents, and the like were covered by one or a combination of the following.
Why and How Did Miscellaneous Policy Forms Emerge?
Around the mid-to-late 1980s, insurers using the three above approaches began to sustain sharply rising levels of claim frequency and severity. At about the same time, consulting started to emerge as an important force within the economy. This was fueled by the desire of many corporations to reduce their fixed employee overhead costs by outsourcing various business functions and their increasing use of computers. By the late 1990s, internet use and related businesses were exploding. As a result, businesses began to routinely require that contractors, consultants, and other third-party service professionals provide evidence of professional liability coverage.
A New Type of Policy Form
In response, insurers developed policy forms for covering the professional liability exposures of this emerging class of nontraditional professionals. However, it became difficult to develop both an individual policy form and a rating structure for each such profession. For example, although there are a fairly large number of real estate property appraisers, the number is still not sufficient to justify the costs of creating a separate policy form and rating structure for such an exposure. Furthermore, accurate loss histories and claim data for such specific groups was difficult to obtain.
So, by the early 1990s, insurers began to group coverage in a more cost-effective way for nontraditional professions under a single miscellaneous professional liability (MPL) policy and then place each nontraditional professional in a specific hazard class (many insurers use five such classes) for premium rating purposes.
On March 6, 2017, Insurance Services Office, Inc. (ISO), finally introduced its first miscellaneous policy form, MI 00 01 06 17.
ISO MPL Policy Form: MI 00 01 06 17
Rather than describe the standard approaches the ISO form uses with regard to various coverage aspects, the following analysis focuses on coverage features that are either broader than standard or more restrictive as compared to the typical MPL policy currently available in the market.
Defense and Settlement
A minority of MPL insurers' policies—including the ISO MPL policy—contain what are known as "coinsurance hammer" clauses. These dictate the sharing of (1) the cost of any ultimate settlement or judgment that is larger than the settlement amount the insurer wanted the insured to accept plus (2) coverage of additional defense costs incurred in continuing to contest the claim (after the insured rejected the insurer's proposed settlement amount). The most common "sharing percentage," and the one found in the ISO form, is 50/50.
An MPL insurer wants to settle a claim for $100,000, but the insured refuses to consent. The claim eventually settles for $200,000, with $20,000 in additional defense costs after the insured's refusal to settle. Under these conditions, the insurer would pay 50 percent of the additional settlement figure (i.e., 50 percent of $100,000, or $50,000) plus 50 percent of the additional $20,000 in defense costs (i.e., $10,000), for a total of $60,000.
In contrast, under a typical "hammer clause" without a coinsurance provision, the insurer would not have paid any of the additional $100,000 in settlement costs or $20,000 in additional defense costs. The benefit of a coinsurance hammer clause, as opposed to a standard hammer clause, is that it mitigates much (although not all) of the risk for the insured in the event the insured decides not to settle a claim based on an insurer's recommendation.
The ISO policy contains three "coverage enhancements" that cover the cost to defend the insured at professional disciplinary proceedings, defend the insured at professional licensing proceedings, and respond to a subpoena received by the insured in conjunction with an alleged wrongful act. What makes this section particularly attractive is that limits for coverages A, B, and C are separately selected by the insured, for which premium charges are levied.
This is an excellent approach because MPL policies (if they provide these coverage enhancements at all, and the majority do not) usually offer them on an automatic basis despite the fact that some insureds may not want to pay any premium for these enhancements. In contrast, the ISO form allows the insured to select/reject the enhancements and then choose specific limits if selected.
The exclusions section of the ISO MPL policy begins with the following preamble.
"We shall not be liable for 'loss' or obligated to defend any 'claim' made against any 'insured' based upon, arising out of or attributable to…."
After this, the policy lists and defines 22 specific exclusions.
The above-quoted preamble, which applies to all of the policy's exclusions (except for one 1, indicates that both indemnity (i.e., settlements and judgments) and defense coverage are excluded when a claim falls within one of the policy's exclusions. (Note that the policy's definition of "loss" encompasses indemnity payments and defense costs.)
Below are discussions of some of the most pertinent exclusions and wordings in the ISO MPL policy.
Exclusion of Defense Coverage for Noncovered Claims
This exclusion of defense cost coverage when indemnity payments are also excluded (except for the dishonesty exclusion) is an unusual approach. In fact, the vast majority of MPL policies in the market will pay the defense costs associated with uncovered allegations. Indeed, it is generally believed that an insurer's duty to defend is considerably broader than its duty to indemnify, a concept that clashes with the ISO MPL policy's approach on this point. This is especially true, since the policy is written on a "duty to defend" rather than a "non-duty to defend" basis.
Use of "Absolute" Exclusionary Wording
The above-quoted preamble also utilizes what is known as "absolute exclusionary wording." The ISO MPL policy preamble indicates that no coverage will be available for any claims encompassed by any of the policy's exclusions that are based upon, arise out of, or are attributable to any of the policy's exclusions. The problem with such language is that it creates the distinct possibility of a strict interpretation of policy wording resulting in a denial of coverage for claims that one would otherwise reasonably believe to be covered. An example will help illustrate.
A professional arbitrator, insured under the ISO MPL policy form, arbitrated a personal injury claim against a construction company brought by an individual who sustained a fractured skull caused by falling debris while she was walking past a construction site. The arbitrator determined that the construction company was not liable for the injury and denied the claimant any compensation.
The arbitrator's MPL insurer denied coverage for the indemnity portion of the lawsuit, stating that the allegations of the suit fell within the policy's "Bodily Injury or Property Damage Exclusion" because the claim was based upon, arose out of, and was attributable to bodily injury. The insurer also denied coverage for the defense of the claim, citing the fact that it had no obligation to defend otherwise excluded claims, as explained in the preamble to the policy's exclusions section.
Yet, it could be convincingly argued that, since the arbitrator's alleged professional error in denying an award was what truly triggered the claim and not direct bodily injury or property damage, the insurer was obligated to provide the arbitrator with both a defense of the claim, as well as any monetary damages that may have resulted from the arbitrator's professional error (assuming he or she committed one).
It should be pointed out that the use of absolute exclusions is not unusual. In fact, this approach has become increasingly common during the past 5 years. Nevertheless, few insurers apply such wording to all of a policy's exclusions, as does ISO, by means of the aforementioned preamble. Instead, insurers more typically use it for certain selected exclusions rather than applying it on a broad-brush basis.
Unusual Exclusions/Wordings of Standard Exclusions
Following are two additional fundamental questions that must be asked in evaluating an insurance policy's exclusions.
- Does the policy contain any "unusual" exclusions not typically found within this type of coverage?
- Are any of the wordings of "standard" exclusions (i.e., those generally contained in a specific type of coverage) either more or less restrictive than what is generally found in policies of this type?
"Abuse or Molestation"
The ISO policy contains an exclusion for abuse or molestation, which is unusual in MPL policies. This exposure is mainly (although not exclusively) an exposure of concern for medical and allied healthcare professionals. Therefore, the typical MPL insurer's approach is not to exclude this exposure in its "base" MPL form, but rather to add an exclusionary endorsement for "abuse or molestation" to professions for which this exposure is problematic. Accordingly, and unlike the ISO form, only a minority of MPL forms contain this exclusion.
"Bodily Injury or Property Damage"
Unlike standard MPL policy versions, ISO's wording of this exclusion also eliminates coverage for "mental injury, mental anguish, mental tension, emotional distress, pain or suffering or shock…." At times, a claimant will allege that he or she suffered one or more such injuries as a result of financial loss due to a miscellaneous professional's error. For example, an independent claims adjuster, who is insured under an MPL policy, misinterprets coverage under a policy and commits an error in recommending payment of a $1-5 million loss the policy actually excludes. When the insurance company client sues the adjuster because of the error, the lawsuit demands $1.5 million plus damages for "shock" and "mental anguish" suffered by the insurance company's chief financial officer. For this reason, most MPL policies do not contain restrictive wording of this kind within their policies' bodily injury and property damage exclusion.
"Insured versus Insured"
Although this is a common MPL exclusion, the ISO wording is both unusual and more restrictive than typical. The ISO exclusion precludes coverage for "[a]ny 'claim' brought by or on behalf of any 'insured' against another 'insured.'" In contrast, standard wording excepts—and thus, covers—claims in which one insured sues another insured in conjunction with a professional act, such as when one partner in an accounting firm commits an error doing personal work (e.g., preparing and filing an annual tax return) for another partner. This exception is appropriate since the purpose of insured versus insured exclusions is to eliminate coverage for claims caused by infighting (e.g., Partner A sues Partner B because he disagrees with a major decision made by Partner A), not from the delivery of actual professional services.
The ISO policy contains three conditions that are favorable for insureds.
The policy requires the insurer to provide the insured a minimum of 30 days' notice prior to nonrenewal. This is a positive feature, since many MPL insurers do not provide any requirement to notify an insured in the event of nonrenewal.
The policy requires that claims be reported no later than 60 days following the end of the policy. This is a positive feature, since a significant proportion of insurers' forms require insureds to report claims within only 30 days of expiration.
Notice of Circumstances Provision
If an insured purchases an extended reporting period (ERP) that is made available under the ISO policy, coverage applies not only to claims reported during the extended reporting period, but also to incidents (that have the potential to result in claims in the future) reported during the ERP. This is a meaningful feature because under about half of all MPL policies' ERP provisions, incidents are not considered reportable.
ISO Endorsements to Customize MPL Coverage
The new ISO MPL program contains more than 70 endorsements. A number of "customizing" endorsements will usually be added to the "base" form. These are of two types—profession-specific and generic. Both of these fall into two categories—those that (1) expand the scope of coverage within the basic MPL policy and (2) restrict the extent of coverage.
The following two examples provide instances in which customizing endorsements are likely to be added, given the nature of the specific profession. Note that the first endorsement expands the scope of coverage offered by the ISO basic MPL form, whereas the second restricts the extent of coverage provided by the form.
Although the ISO (and virtually all) MPL forms exclude bodily injury liability coverage, this is an exposure for which certain miscellaneous professionals must have coverage. Beauty salons are a prominent example. Thus, the new ISO program includes the endorsement "Salon Services—Bodily Injury Sublimit," MI 02 09 06 17, that adds back bodily injury liability coverage, subject to a sublimit. The sublimit does not increase the basic policy's overall coverage limit, yet affirmatively affords bodily injury liability coverage.
Investment Advisors and Stock Brokers
These professionals should never provide guarantees or warranties regarding the actual performance of investments that they recommend. Accordingly, MPL policies covering such professionals will have ISO's "Investment Performance Exclusion," MI 05 07 06 17, attached, which excludes claims alleging that the insured guaranteed specific rates of return on recommended investments.
In addition to the profession-specific endorsements, there are a number of generic customizing endorsements (applying to all professions) that can be added to the basic MPL form. As is the case with profession-specific customizing endorsements, some have the effect of expanding coverage, while others restrict the scope of coverage an MPL policy provides.
Additional Defense Costs Limit
As is the case with virtually all professional liability policies, the ISO MPL policy covers defense within policy limits, rather than in addition to policy limits, as is the case under CGL forms. Given the perils of these so-called shrinking limits policies (especially in a professional liability context, where the costs of defending a claim sometimes exceed settlement/judgment amounts), the ISO MPL program offers the "Limit of Liability Amended—Additional Defense Costs Limit," MI 03 03 06 17, which allows an insured to obtain a specific additional coverage limit dedicated solely to defense costs.
Professional Services Exclusion
At times, an MPL underwriter may be unwilling to cover a certain professional service provided by an insured, despite the fact that the underwriter is comfortable with the risk on an overall basis. An example would be an underwriter who doesn't want to cover a literary agent's potential liability for a specific tell-all book. To avoid this, the MPL underwriter attaches ISO's "Professional Services Exclusion" endorsement MI 05 11 06 17 to the literary agent's policy, adding the book title to the endorsement's "Schedule of Excluded Professional Services."
ISO's new MPL policy form contains a number of broader-than-standard features—a coinsurance hammer settlement clause; the option to select specific, separate limits for a package of coverage enhancements; a requirement to notify the insured in the event of nonrenewal of the policy; a 60-day post-policy claim reporting window; and an extended reporting period option that also encompasses "incidents" as reportable claims. In addition, the program contains more than 70 customizing endorsements, a number of which are routinely added to any MPL policy.
The ISO policy's shortcomings are found within its exclusions—the lack of defense coverage for uncovered allegations, application of "absolute" exclusionary language to all but the policy's dishonesty exclusion, the presence of an abuse or molestation exclusion within the standard form, and nonstandard wording of the policy's bodily injury and property damage and insured versus insured exclusions.
Particular effort should be made to negotiate a broadening of the policy's defense of noncovered allegations exclusion and to narrow the policy's use of absolute exclusions so that such wording applies to a smaller number of exclusions.