Professional Liability (Errors and Omissons Insurance)
As anyone who has ever shopped for commercial insurance knows, there are numerous types of policies and coverages available in the marketplace with a multitude of various forms, exclusions, endorsements, and so on to consider. It’s enough to make even Albert Einstein scratch his head.
One of the most commonly misunderstood – and overlooked – types of insurance that a company or individual may require is ‘Professional Liability’ insurance. This is often referred to as “E&O” or “Errors and Omissions” insurance.
To begin, it is important to understand that ‘General Liability’ and ‘Professional Liability’ insurance are two completely separate and mutually-exclusive types of policies or coverages. The only similarity between the two at all is that that have the word ‘liability’ in their titles. Just like a Rolls-Royce sedan and a Ford F-150 pickup are both automobiles, they are completely different in their design, intended use, features, and the demographic of their respective owners. So too are General and Professional liability.
General liability is what every business should have in place to protect against claims arising from bodily injury, defective products, advertising injury, and similar acts for which the company may be accused of being ‘liable’. This coverage will provide payment for legal and defense costs, settlement fees, medical payments, and other related costs. However, it does not provide for coverage against mistakes made while in the execution of a ‘professional’ service.
Don’t Be Fooled. Professional Liability coverage is not provided by a General Liability policy and General Liability does NOT provide coverage for errors, contract performance disputes or any other Professional Liability issues. Companies who have General Liability without Professional Liability insurance coverage are taking a serious risk. It’s like a doctor practicing medicine without Malpractice Insurance.
Professional Liability, also referred to as ‘Errors and Omissions’, picks up where general liability leaves off. It provides defense and settlement coverage for claims brought by customers for acts of negligence, omission of information, or other errors made while performing a professional service such as provided by a CPA, Realtor, Mortgage Broker, Financial Advisor, Architect, Consultant, and many other professions. In short, Professional Liability insurance protects you and your company from claims if your client holds you responsible for errors, or the failure of your work to perform as promised in your contract.
Common reasons alleged in making claims on these policies are negligence, misrepresentation, violation of good faith and fair dealing, and inaccurate advice. For example, if a software product fails to perform properly, it may not cause physical damages, personal or advertising injuries, therefore the general liability policy would not be triggered to pay or provide coverage. It may, however, directly cause financial losses which could potentially be attributed to the software developer’s misrepresentation of the product capabilities.
Another example might be that of a Realtor, working as a Buyer’s Agent, who is assisting his or her customer in purchasing a new home. However, the Realtor is aware of a new public construction project planned to begin in the near future close to the home which may affect property values and livability, but he or she is worried that if the buyer learns of the project that he will cancel the purchase contract and the Realtor will not earn a commission. Because of this, the Realtor omits or simply fails to provide information on the upcoming project and the buyer purchases the house unaware of the future plans. Six months later construction begins and the buyer files a claim and/or lawsuit against the Realtor alleging misrepresentation, failure to act in good faith, and omission of critical information regarding the transaction.
With Professional Liability, coverage includes legal defense costs (either within or outside the policy limit), no matter how baseless the allegations, as well as payment of any resulting judgments against you, including court costs, up to the coverage limits on your policy. This coverage also extends to both W2 employees as well as 1099 subcontractors and it can be worldwide in the scope of coverage.
Most Importantly, Professional Liability insurance might save you and your company from extreme embarrassment, a lost client, or worst of all, a bad reputation in the marketplace.
It is important to know that Professional Liability policies are not the same from all insurance carriers or for all industries or professions. For example, there are specific E&O policies for technology companies, such as software developers, technology consultants, and other creators of technology. This coverage focuses on the failure to perform, financial loss, and error or omission of the products or services sold. Additional coverage for breach of warranty, intellectual property, personal injury, security and cost of contract can be added as well. These coverage differ greatly from the policies used for financial services or real estate professionals.
There is sometimes confusion, on the part of both the agent as well as the customer, as to which professions or companies actually need Professional Liability coverage in addition to the General Liability that they may already have in place. While there is no exact answer, there is a large list of industries known to need this coverage, such as accountants, insurance agents, Realtors, attorneys, financial professionals, and similar. However, there are always companies or industries that may or may not have a true “professional” exposure and it is up the company and the agent to accurately identify any potential exposures or potential for loss related to professional services that may be provided. A general ‘rule of thumb’ is that most professionals or companies with formal licensing or which provide any type of ‘professional’ advice, recommendations, or information on which their customers may rely to base decisions with far-reaching implications have a ‘professional exposure’. The exception to this are artisan contractors such as electrician’s, plumbers, HVAC technicians and similar who, although licensed by the state, do not provide professional advice; rather, they perform mechanical installations and repair work.
Finally, Professional Liability policies are usually issued on a ‘claims-made’ basis, meaning that the policy only covers claims made during the policy period, not claims which may relate to incidents occurring before the coverage was active. Once established, it is important to continue your coverage due to the fact that canceling the policy will, in effect, make it as if you never had coverage for any incidents.