Professional liability insurance is traditionally purchased by firms made up of architects and engineers, physicians, dentists, accountants and lawyers to protect against patients or clients alleging that negligence on the part of the professional caused physical injury or possibly economic loss to their clients.
“Over the last 20 years, the definition of professional services and the related duty of care owed by various consultants to their customers has broadened considerably,” says Philip Glick, a senior vice president with ECBM Insurance Brokers and Consultants. “As examples, real estate brokers, computer consultants and software engineers, insurance brokers, construction managers and contractors, and other miscellaneous types of consultants now are considered as professionals and face potential errors and omissions types of liability claims.”
Smart Business spoke with Glick about how professional liability insurance is changing and why you may need it.
Why doesn’t a general liability policy cover these types of claims?
General liability insurance is intended to cover claims arising out of bodily injury, or property damage arising from the client’s premises or related operations, including potential product liability losses. Similarly, a contractor’s general liability policy would cover potential claims based on completed operations such as construction of buildings or maintenance of facilities. General liability insurance does not cover economic loss suffered by a client due to an error or omission committed by a business, for example, if a client buys a new product, such as a high-speed printing press, and the press works but produces a lower hourly volume than expected.
Additionally, general liability insurance companies often exclude bodily injury claims arising from other types of professional services, such as pharmacists, health club operators, physicians and surgeons, architects and engineers and security guard companies. This exclusion mandates the need to buy separate professional liability coverage that will pick up both economic loss and bodily injury claims arising out of the designated professional’s products or services.
What is the solution to these gaps?
For firms traditionally recognized as professionals, the solution is to specifically purchase separate professional liability insurance in addition to commercial general liability insurance. For sports therapists, health clubs and sprinkler protection contractors, the simplest solution is to be sure that there is no specific professional services exclusion in their commercial general liability policies so bodily injury or property damage claims arising out of services will be covered. If there is also a potential exposure for pure economic losses to their customers, they will have to purchase a separate, stand-alone professional liability or errors and omissions policy.
What are some coverage pitfalls to avoid in insuring these exposures?
It’s critical to coordinate coverage provided under a commercial general liability policy with that provided in a separate professional liability or errors and omissions policy. Any professional services exclusion in a firm’s commercial general liability policy eliminates any coverage for claims involving bodily injury or property damage liability claims arising out of their professional services.
At the same time, some professional liability policies only cover pure economic loss and exclude bodily injury liability claims, resulting in a significant gap in coverage The solution is to buy broad professional liability coverage that includes bodily injury and property damage liability-type claims, as well as pure economic loss. Although insurers sometimes will not provide this full protection, they will provide contingent bodily injury and contingent property damage coverage, which cover claims due to physical injury or damage to the property of a client if not covered in the client’s general liability policy.
Another typical exclusion involves claims due to contractual guarantees or other express warranties of price, cost or performance, or a return of fees. Unfortunately, these claims are not insurable in a professional liability policy. A solution is to amend the policy so the coverage is still provided for claims arising out of contractual guarantees or warranties if the underlying cause is due to the insured’s negligent acts or omissions.
Many professional liability policies are written on a claims-made basis, meaning that the insurance only covers claims that are filed or made during the current policy year and the related error or wrongful act occurred on or after the starting date of the policy a so-called prior acts inception date. In this case, the insurance buyer wants to negotiate a prior acts date for its professional liability policy as early as possible. Each year coverage is renewed, the insured should be certain that the same prior acts inception date is maintained.
What coverage extras should be included?
The policy should include:
- The option for the insured to choose its own defense lawyers subject to approval from the insurer.
- The broad definition of a covered claim that includes regulatory investigations or administrative actions by a government agency; coverage of legal fees incurred to defend against a demand for an injunction or other nonmonetary relief; coverage for a claim alleging a dishonest or a criminal act until found by a court upon final adjudication; and coverage of punitive damages to the extent allowable by state law.
- An absolute right to buy a ‘tail’ or ‘extended reporting period endorsement’ of one to three years in the event that the policy should not be renewed by either party. This extends the policy after it has expired to cover a claim arising from a wrongful act or error during the prior coverage period.
- A very broad listing of covered professional services under the policy.
Philip Glick is senior vice president with ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100, ext. 1310, or firstname.lastname@example.org.