The Professional Liability Insurance Failures Leaving You Exposed

Accountants, realtors, architects, chiropractors, consultants – these professionals provide services that underpin our economy. Unfortunately, even the most revered workers can face lawsuits. Regardless of validity, a disgruntled client can provoke a costly legal battle that can cause financial and reputational harm. 

Professional liability insurance is supposed to shield these professionals from such risk. But having an active policy isn’t enough. If your claim doesn’t pass muster, you run the risk of losing your claim, which could have a cataclysmic effect on your business and personal finances. 

If your professional liability insurer has left you exposed, all hope is not lost. In this article, we’ll go over professional liability denials – how they happen, why they happen, and what an attorney can do to help you.  

Why was my claim denied?

Professional liability insurance policies protect policyholders from paying for damages out of pocket if they’ve been sued by a client and found liable for that mistake in court.

Professional liability insurance can be used to cover the following expenses up to the policy’s limit: 

• Legal defense
• Settlements
• Judgments
• Other claim-related expenses

Professional liability insurance covers businesses and professionals from lawsuits that allege:

• A mistake was made on the job
• Key details were left out of the work
• The work was performed carelessly
• The client received bad advice

While this all sounds great in theory, you need to file a claim that meets the standards dictated by your policy to unlock coverage. And even then, coverage is not guaranteed. 

If your professional liability insurance claim was denied, here’s what may have happened: 

Your policy doesn’t do what you thought it did 

The first step is to figure out why your insurer denied your claim. One of the most common reasons claims are denied is the insured doesn’t understand the terms of their policy. This isn’t unique to professional liability – it applies to all coverage areas. 

It’s likely you misunderstood the terms of the policy in one of two ways: 

1. You didn’t meet the terms of the policy

Just because you authorize a recurring payment to your insurer every month doesn’t mean you are guaranteed blanket coverage. 

To unlock your insurer’s support, you need to demonstrate that your claim doesn’t involve evidence of:

• Intentional wrongdoing – Insurers won’t pay for damages related to cheating or lying to clients 
• Prior knowledge – If you knew about the problem before getting the insurance plan, your insurer will not want to cover you
• Work outside the coverage area – Providing service in a state not covered by your policy would lead to a coverage denial
• Discrimination – Lawsuits that involve alleged discrimination are not covered
• Criminal acts – Working without a license and other illegal activities is a fast track to claim denial
• Intellectual property infringement – Using someone’s copyrighted material will get your claim denied

2. Your recurring payments were too small

Every insurance policy includes a policy limit. How much monetary support you can claim depends on your premium rates. If you have kept up with relatively low quarterly or monthly payments, thinking you were getting a deal, you weren’t. Insurance is a business, and smaller payments can guarantee a smaller payout. 

There’s evidence you had prior knowledge or acted with intent

If you submitted written communications like emails, work chats, call logs, or anything demonstrating a willful disregard for your client’s best interests, your claim was doomed from the start. 

The investigation was inadequate

At the end of the day, the insurance company’s investigation left much to be desired for my client. There was usually more than one inadequacy associated with the investigation. 

“Refusing to pay claims without conducting a reasonable investigation based upon all available information” violates Colorado law. Insurance companies doing business in Colorado are legally obligated to do due diligence by the insured. This includes overseeing a thorough investigation. C.R.S. 10-3-1104 (1)(h)(IV) 

Should I appeal the decision?

If you’re confident you followed all policy guidelines and the claim rejection seems unfounded, your insurer might be mistaken. 

A denied professional liability claim can be more than just frustrating; it could unfairly impact your ability to secure future coverage, from professional liability to even home or auto insurance. If the error lies with your insurer, shouldn’t you fight for the protection you paid for?

A good insurance claim denial attorney, also called a bad faith attorney, can help you file the appeal with your insurance company. A great attorney will advise you on whether they think your case constitutes a violation of Colorado’s bad faith laws.

When is a denial in bad faith?

In Colorado, bad faith is generally seen as an insurer’s unreasonable refusal to pay a claim and act in good faith. The following actions constitute bad faith: 

These are a few of the more egregious errors I see when representing my clients against their professional liability insurance providers: 

Demanding the impossible 

The insurance company asked for evidence that was burdensome to obtain without an expressed reason for doing so. C.R.S. 10-3-1115(2) 

Twisting the policy 

The insurance company denied a claim by incorrectly applying an exclusion clause that didn’t truly fit the situation. Misrepresenting the benefits, advantages, conditions, or terms of an insurance policy is illegal. C.R.S. 10-3-1104 (1)(a)(I)

Poor communication

Negligible efforts to update you on the status of your claim, from unreasonable delays to failing to notify you of requirements, could violate Colorado law. C.R.S. 10-3-1104(1)(h)(XIV)

Unreasonable delays

You have a right to a reasonable explanation based on the applicable facts and a right to timely updates. In Colorado, that’s 60 days. Delays must be explained in writing every 30 days. 3 CCR 702-5

All of these factors can create conditions for an inadequate investigation, and I share your frustration. Not only is your professional life on the line, but your insurance company is making things worse – that’s not what you pay them for. 

To prove bad faith, you must demonstrate the company did not use the available information to come to a reasonable conclusion regarding your claim, which caused you to suffer. The extent of the suffering would entitle you to a platter of damages. 

What happens if I win?

In short, money. Your liability insurance provider will be legally obligated to financially compensate you for what you would have been entitled to if your claim had not been wrongfully denied. And we’re just getting started…

Insurer will have to pay your legal fees

Win a bad faith lawsuit against your insurance company for a wrongfully denied professional liability claim, and expect your insurer to cover any legal fees you incurred. Get your bad faith case covered, as well as the legal defense for your client’s suit against you and any damages that the court has ordered you to pay. 

Your insurer will have to pay you in damages 

Win a bad faith case against your professional liability insurer, and you can expect to recover the following damages: 

• Economic – Compensation for direct final loss as the result of your insurer’s conduct
• Noneconomic – Compensation for any harm you endured that isn’t financially measured, including but not limited to emotional distress and inconvenience 

And if you can prove your insurer acted willfully in bad faith, you may also be entitled to punitive damages. We might also want to file a breach of contract suit. But let’s not get ahead of ourselves. 

Your insurer can’t retaliate by canceling your policy

Even if your professional liability insurer is angry that they took a gamble with you and lost, don’t worry: insurers can’t retaliate by upping your rates or canceling your policy. Colorado law protects you from such actions. However, if they try anything funny, get in touch with me. 

We hold insurance companies accountable for bad faith practices

If you’re a professional who suspects your insurer has denied your claim in bad faith, call 303-688-0944 to begin your case assessment.