With the shift to a service-based economy, consumers are demanding accountability and standards have become more stringent. And as a result, many companies have learned just how costly an error in judgment can be.
“One of the things that changed in our country as we went from manufacturing-based to service-based is that the acceptable standards of care are being ratcheted up over time,” says James Misselwitz, vice president at ECBM Insurance Brokers and Consultants. “The reality is that people who never thought they had errors and omissions exposures may have the potential for exposures developing around them and in their business activities.”
Smart Business spoke with Misselwitz about how E&O and professional liability insurance coverage can help you avoid legal trouble.
Who needs professional liability or errors and omissions insurance?
Professional liability insurance and errors and omissions insurance are basically two sides of the same coin. Professional liability insurance has long been recognized with the public as for those professionals who are held to the highest standards of care, such as doctors, lawyers, architects and engineers.
E&O is reserved for those who have similar requirements in terms of care, but society has not yet recognized them as having the same professional requirement for that standard. Some examples are appraisers, brokers, real estate agents, marketing researchers and exterminators. Those professions still have a professional standard with which they must comply, but society hasn’t held them to the same standard as the other professions. So E&O is used in one instance and professional liability in the other.
What are the differences in coverage between professional liability and E&O insurance?
Professional liability is likely to include covenants that will apply to the professional standards of care for their actual patients or clients. Bodily injury and property damage, even economic loss, will be covered by a typical professional liability policy for a physician, architect or engineer.
Professionals with errors and omissions coverage would be more underwritten toward the economic loss that they might cause as a result of failure to perform. Economic loss is the driving factor in errors and omissions exposures, and in the professional liability arena, the danger to people is the driver.
What are some standard E&O risks?
The classic dangers of providing service to others for a fee are twofold: indemnity and defense costs. Indemnity is a fancy word for making someone whole or returning them to the state that they were prior to the service or failure of service. Defense costs are the legal fees and bills you pay to defend yourself in the event that there is an allegation against you. Insurance policies can provide protection for these events.
How can business owners determine if they have these types of exposures?
If I were a business owner trying to identify the extent of my E&O exposure or whether I even had an exposure I’d ask one question: Do I provide services and advice to third parties for a fee? To the extent that you do that, 100 percent of the time you are going to have some type of professional liability/E&O exposure.
I have yet to see anyone providing services to a third party in the U.S. and then bartering for services in return. There could be an example where the provider doesn’t get paid and receives service in return, but that doesn’t come into play very much.
So it goes back to that question: Do you provide services to third parties for a fee? If you can answer yes to that question, you ought to start examining what it is you do and what you have to do to minimize the risk and protect your assets.
How can you protect yourself from these risks?
First and foremost would be some form of active risk management program. I would put continuous education at the top of the risk management program. The most danger occurs for business owners when they fail to stay current with the technology and advances in their field.
Another way is by using indemnification agreements or through the transfer or limiting of risk through contractual provisions. You could use examples of risk management techniques such as peer review or contract review. Lastly, you could buy insurance, which is a way to deal with the protection issue. If you do buy insurance, seek an agent or broker who has significant experience in this field of insurance. Your standard agent handling your homeowners’, automobile or business owners’ policy might not be familiar with this coverage. A good risk management program should be a combination of all of those things.
How can you set up an active risk management program?
You should definitely have an education component for your key people. Keep your licenses current and keep your continued education requirements in line.
Make sure that if there is a peer review requirement that you are cognizant of it and you comply with those efforts. Indemnification language inside contracts is very important, as well. You want to make sure both parties understand what service and fee you are providing, as well as when that service begins and ends.
You can even put limits in the contract. For example, if you’re a landscaper and you’re going to get paid $20,000 year, you can put a limitation in the contract stating that the most you can ever owe someone is what they pay you. You can’t do that if you are a doctor, obviously. That’s one example of how you can protect yourself, depending on where you are on the professional standard of care list.
James Misselwitz is vice president at ECBM Insurance Brokers and Consultants. Reach him at email@example.com or (610) 668-7100.