Professional Liability Insurance (also known as Errors & Omissions or Malpractice Insurance) protects individuals and companies providing professional advice and services from the cost of damages from lawsuits by dissatisfied clients.
This insurance protects individuals and businesses that sell their expertise. It covers professionals who have gained expertise through extensive training in their field and whose work is governed by standards set by client agreements, their industry, or the government. It is a good complement to the basic protections provided by general liability insurance.
Professional Liability Insurance provides protection against lawsuits arising from:
- Work errors or mistakes
- Failure to do what was promised
- Undelivered or uncompleted work
- Actual or alleged negligence
- Violation of good faith and fair dealing
- Inaccurate advice
Professional Liability Insurance will pay for judgments against your business for these types of lawsuits. It will also pay the costs of your legal defense whether or not your business is at fault. Unlike most liability insurance, legal defense costs are counted as part of your limits of coverage.
This insurance covers you, your business, your employees, and independent contractors while they are working for your business.
Sometimes your clients may require professional liability insurance in order to do business. Additionally, for some professions like law and medicine, it is required by law.
Examples of professional liability insurance protecting a business include:
- A property management company manages a commercial building for a building owner. The roof leaks, causing damage to the interior of the building. The building owner sues the property manager for negligence for failing to repair the roof leak.
- An event promoter contracts with a printing company to print flyers for a concert. The printer delivers the flyers 5 days later than promised in the contract, which is after the concert has already happened. The event promoter sues the printing company for lost revenue, accusing them of breach of contract and misrepresentation.
- A stationery wholesale company hires a management consultant to help the company design a reorganization plan. The plan is put into action, but after 12 months, the company’s profits are lowered due to the plan. The company sues the consultant for inaccurate advice.
- An investment advisor recommends an investment to a client. The investment loses 50% of its value over an 18 month period. The client sues the advisor for inaccurate advice.
- A software consulting company creates custom software for a financial services client. After delivery, the client finds critical bugs in the software, leading to financial losses. The client sues the consulting company for work errors and negligence.
The terms Professional Liability Insurance, Errors & Omissions and Malpractice Insurance are different names for the same type of insurance. By convention, some of the names are more common in certain industries.
Professional Liability Insurance can benefit a number of professions, including:
- Construction and maintenance (such as general contractors and plumbers)
- Financial services and investment management
- Transportation providers
Errors & Omissions is another name for Professional Liability Insurance, and this name is commonly used in these professions:
- Appraisers, real estate brokers, and home inspectors
- Insurance agents
- Notaries Public
- Management and IT consultants
- Software developers
- Graphic Designers
- Family and Mental Health Counselors
- Beauticians, Salons or Barbershops
- Occupational Therapists
- Personal Trainers
- Property Managers
- Travel Agents
- Funeral Directors
Malpractice Insurance is the name for Professional Liability Insurance in the following fields:
- Lawyers: Legal Malpractice
- Doctors: Medical Malpractice
- Dentists: Dental Malpractice
- Nurses: Nurse Malpractice
- Opticians: Optician Malpractice
Professional Liability Insurance is written on a claims-made basis, which means that claims are only covered if the claim is made while the insurance policy is active. This is a major difference from other liability insurance such as commercial general liability, which are occurrence policies. With a claims-made policy, if you do not have an active policy, you have no coverage for any of your past actions. This is important because in professional work, a client may not discover an error until much later than when the work is completed.
Occurrence policies will pay a claim if the event that caused the liability occurs during the policy period, even if the policy is no longer active. For example, an occurrence policy has a policy period of Jan 1, 2017 to December 31, 2017 and is not renewed. A fire occurs on December 29, 2017, and a claim is made on January 10, 2018. The fire will be covered by the occurrence policy because it occurred during the policy period, even though the claim was filed after the policy had ended.
With a claims-made policy, a claim will only be covered if the claim occurs while the insurance policy is in force. For example, a surgeon has a claims-made policy that expires on December 31, 2016 and the policy is not renewed or replaced. The surgeon performs surgery in August 2016. In February 2017, at a follow-up appointment, the patient discovers an error in the surgery and sues the surgeon. Since the claims-made coverage is no longer active, the surgeon has no insurance coverage even though the surgery occurred while the insurance policy was active. Since the claim is made when the insurance is not active, there is no coverage.
Many claims-made policies have a retroactive date. Any acts that occur before the retroactive date will not be covered, even if the claim is made while the insurance is active. For example, an insurance policy with a retroactive date of January 2017 will not cover a claim filed in February 2017 for an act that occurred in November 2016, even though the insurance is active when the claim is filed.
Changing Insurance Carriers and Gaps in Coverage
When changing insurance carriers for a claims-made professional liability policy, it is important to secure prior acts coverage (nose coverage). Prior acts coverage allows your new policy to inherit the retroactive date from the previous policy. Without prior acts coverage, once you cancel your old policy, you won’t have any coverage for any previous acts.
Gaps in coverage can occur if you do not renew the professional liability policy by the day it expires. If you have a gap in coverage, you will lose all coverage for prior acts. Most insurance carriers will not allow you to reinstate your retroactive coverage if it lapses without a good reason such as a natural disaster or personal medical issues. A warranty letter representing that you have no knowledge of pending claims is also required. Renewing on time is critical to ensure you don’t lose coverage for past acts under your professional liability insurance.
If you are unable to purchase prior acts coverage from your new insurance carrier, tail coverage (also known as extended reporting period) is usually available from your existing insurance carrier. Tail coverage is also sold on a standalone basis from other insurers.
Tail coverage covers events that occur while the policy is in force but that are not reported until after the policy terminates. A typical tail extends the reporting period for 6 months to a year after the policy terminates. However, other lengths of time are available, up to an unlimited reporting period.
For example, a lawyer terminates his legal malpractice insurance in December 2016. He also purchases unlimited reporting period tail coverage. The tail coverage covers liability for any acts that occurred before December 2016. If a claim is filed in September 2017 for work that was performed earlier than December 2016, the claim will be covered.
For professionals who want to retire, it is important to purchase tail coverage, because you may still have liability for work you have done before retiring. If you cancel your policy without tail coverage, you will not have any coverage for any of your past work and may still be sued.
Shrinking Limits of Insurance – Legal Defense
Because legal and attorneys’ fees are a large proportion of professional liability claims, Professional Liability Insurance has “shrinking limits” of insurance. This means legal costs are included in the limit of insurance, which differs from most other types of liability insurance.
In commercial general liability insurance, legal costs do not count towards your limits of insurance.
For example, if you had a professional liability insurance limit of $1 million, and you have a judgment against you of $800,000, and $400,000 of legal fees, the maximum the policy would pay out is $1,000,000, and you would be responsible for the additional $200,000.
In contrast, if a general liability policy had a limit of $1 million, and also had a judgment of $800,000 and legal fees of $400,000, that policy would pay for all of the judgment and the legal fees. This is because the judgment amount is less than the limit of liability and general liability does not have “shrinking limits” so legal fees are fully covered and not counted towards the insurance policy limits.
What doesn’t Professional Liability Insurance cover?
Professional Liability Insurance does not cover bodily injury (except in the case of medical malpractice), property damage, or personal and advertising injury. To cover these risks, you’ll want to complement your Professional Liability Insurance with General Liability Insurance.
Additionally, Professional Liability Insurance will not cover any criminal liability or criminal defense. It also excludes any intentional or dishonest acts.
Deductibles are the amount of a loss for which you are financially responsible before the insurance company’s coverage begins. A deductible is a form of risk-sharing, which provides a financial incentive for you to try to avoid claims.
Unlike most types of liability insurance, Professional Liability Insurance does usually have a deductible, with common amounts being $1,000-$25,000. The higher the deductible, the lower your insurance premiums will be.
How do I reduce the risk of lawsuits?
Although it isn’t possible to eliminate lawsuits entirely, there are steps you can take to reduce risks in your business. Ways you can plan to reduce mistakes include:
- Set clear expectations with clients before starting work
- Keep detailed notes and files on client projects
- Focus on ethics and honesty, and stay within your area of expertise.