PROFESSIONAL LIABILITY INSURANCE
“Everyone makes mistakes,” is an old phrase that employers and their employees use every day in business. But what happens if one of those mistakes results in another company you are working with losing money? Without Professional Liability your business could be sued for these acts and could have to pay large sums of money out of pocket.
What is Professional Liability Insurance?
Professional Liability is a type of insurance that protects your business against claims that arise from you or your employee’s negligent acts, errors, or omissions that result in a financial loss to another company or individual. Typically, the liability is a result of either advice provided, or services offered.
What is Covered by a Professional Liability Policy?
Like most liability policies, the basic coverage provided by a Professional Liability policy is specified as one coverage limit (i.e. $1,000,000). That limit can be used to pay out the following costs and fees:
- Defense costs
- Professional liability claims can be extremely expensive to defend in court. Attorney’s fees can rack up as your defense researches, prepares, and defends your claim. Without coverage you would be left paying for these costs out of pocket.
- Court Judgments
- Judgments awarded against your businesses by a court can also be extremely expensive.
- Professional Liability policies can also pay cost to resolve litigation outside of court.
Is E&O Insurance the Same Thing as Professional Liability Insurance?
Yes! Professional Liability is also known as Errors or Omissions (E&O) insurance. So, when reviewing contracts, you may see either term used, but they typically are referring to the same coverage. It’s similar to calling General Liability “slip and fall insurance.”
Is Professional Liability Insurance Legally Required in Florida?
Depending on your business type, Professional Liability insurance may be required by the state of Florida or local licensing board. For example, medical professional liability insurance or medical malpractice is almost always required for certain medical professionals. With other professions, there may not be a state or federal requirement, but contracts with your clients, contractors, vendors, or suppliers may require that you carry coverage.
Who Needs Professional Liability Insurance?
If you or your employees have the potential for making mistakes that could lead to another individual or company losing money, then your business needs professional liability insurance. Nearly every business should carry Professional Liability coverage, but some businesses have a higher need. In fact, to work with other vendors or suppliers, professional liability insurance may be required from the following professions:
- Computer Programmers
- Financial advisors
- IT professionals
- Legal professionals
- Medical professionals (medical malpractice)
- Mortgage lenders
- Insurance agencies, brokers, and companies
- Property management
- Real estate agents and brokers
- Software developers
- Title companies
What Effects the Cost of Professional Liability Insurance?
Similar to other types of business insurance, there are a lot of factors that are used to calculate an insurance premium for your business. However, chief among those is business type, revenues, and claims history, but there are other premium drivers as well.
Premium Drivers in Professional Liability Insurance:
- Type of business
- Revenues of the business
- Claims history
- Location of the business
- Number of employees
- Number of years in business
- Coverage limits selected
- Deductible selected
- If prior acts are covered
What Claims Would be Covered by Professional Liability and Not General Liability Insurance?
General Liability insurance is most common coverage that businesses purchase, but it’s not the only coverage your businesses needs. General Liability protects a business against liability from bodily injury, property damage, personal injury, products liability, and other damages. However, General Liability policies typically have exclusions for professional services. The following events would typically be covered by a Professional Liability policy, but not a General Liability policy:
- Errors or omissions
- Inaccurate information/advice
Why Is Professional Liability Typically a Claims Made Policy?
Unlike General Liability coverage, which is most often written on an “occurrence form,” Professional Liability is written most often on a “claims made” form. This means that for coverage to exist, the following must also be true:
- The wrongful act, error, or omission must have occurred after the retroactive date or prior acts date (more on this later)
- The claim must be made against the business & reported to the insurance company during the policy term
Insurance companies know that Professional Liability claims are “long tail” events, meaning that the claims may take years to notice or to develop. In order to keep premiums low and to avoid paying out on claims way after they occur, insurance companies put a cap on the date that a business can file a claim after a policy is dropped or cancelled. Typically, that is 30 to 60 days after the expiration of a policy unless “tail coverage” is purchased
What is a Retroactive Date?
The retroactive date (or retro date) is the date set by the insurance company that limits covered claims to those that occur after that date. As a business, you want to be sure to move the retroactive date as far back as possible.
What is Tail Coverage?
Tail coverage, which is technically called an “extended reporting period,” allows businesses that are dropping coverage or moving to an insurance company without full prior acts coverage to purchase extended coverage beyond the typical 30 to 60 days. Most carriers offer at least 1 year, but some carriers may offer annual increments up to 5 years or more. The premiums for the tails vary by carrier, but 1 year is typically about the same as the expiring premium.
What Are Some Examples of Professional Liability Claims?
- An accountant fails to file a form for a client with the IRS. Years later the client is forced to pay back taxes, interest, and penalties.
- A medical assistant misplaced a lab report and failed to show it to the doctor, leading to further patient injury and increased medical bill.
- An insurance agent accidentally adds a commercial property on a commercial property schedule at $40k instead of $400k. A few weeks later the building was destroyed due to a hurricane.
- The clients of a real estate agent purchased a home based on the facts that the agent gave them about commercial zoning. After the city council denied the zoning change, the client sued the agent for negligence.
- A property management company refused to rent to an individual based on their race. The prospective tenant sued for discrimination
What Professional Liability Endorsements are Available?
- Full Prior Acts
- Providing full prior acts, removes the retroactive date and therefore covers claims that occurred prior to the inception date of the policy. When providing full prior acts an insurance company may add a prior and pending litigation date to remove coverage for any prior or pending litigated issues.
- Soft Hammer Clause
- A hammer clause or consent to settle provision is a clause that is in most professional liability policies. Typically, the hammer clauses are “hard,” meaning that if your business refuses the insurer’s settlement offer, you could be on the hook for all or most of the future litigation costs. However, with a soft hammer clause, if you go against the insurance company’s recommendations to settle, then the insurance company will split any future litigation costs with you based on proportion noted in the policy or endorsement. Typical options are 50/50, 70/30, or 80/20.
- Defense Costs Outside the Limits
- This endorsement prevents the insurance company’s defense costs and attorney’s fees from eroding your liability limit.
- Additional Defense Limits
- Sometimes carriers do not want to offer unlimited defense costs or defense costs outside the limits because of the unknown potential for loss. However, another option is to specify an additional defense limit of insurance that can be used to pay defense costs. This way the insurance company can appropriately price for the added risk.
Insurance Coverage Specializations
- Accountants Professional Liability
- Architects & Engineers E&O
- Construction Professional Liability
- Consultants Miscellaneous E&O
- Investment Advisor E&O
- Lawyers Professional Liability
- Medical Malpractice
- Mortgage Broker E&O
- Insurance Agency E&O
- Property Management E&O
- Real Estate Agent & Broker E&O
- Tech E&O
- Title Agents E&O