Professional liability insurance

Last updated

Professional liability insurance (PLI), also called professional indemnity insurance (PII) but more commonly known as errors & omissions (E&O) in the US, is a form of liability insurance which helps protect professional advising, consulting, and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client in a civil lawsuit. The coverage focuses on alleged failure to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the policyholder. These are causes for legal action that would not be covered by a more general liability insurance policy which addresses more direct forms of harm. Professional liability insurance may take on different forms and names depending on the profession, especially medical and legal, and is sometimes required under contract by other businesses that are the beneficiaries of the advice or service.

Contents

Coverage almost always provides for the defense costs, including when legal action turns out to be groundless. Coverage does not include criminal prosecution, nor a wide range of potential liabilities under civil law that are not enumerated in the policy, but which may be subject to other forms of insurance. Professional liability insurance is required by law in some areas for certain kinds of professional practice.

Rationale

The primary reason for professional liability coverage is that a typical general liability insurance policy will respond only to a bodily injury, property damage, personal injury or advertising injury claim. Other forms of insurance cover employers, public and product liability. However, various professional services and products can give rise to legal claims without causing any of the specific types of harm covered by such policies. Common claims that professional liability insurance covers are negligence, misrepresentation, violation of good faith, and inaccurate advice. Examples:

Coverage

Professional liability insurance policies are generally set up based on a claims-made and reported basis, meaning that the policy covers only those claims made and reported to their carrier during the policy period. [1] More specifically a typical policy will provide indemnity to the insured against loss arising from any claim or claims made during the policy period by reason of any covered error, omission or negligent act committed in the conduct of the insured's professional business during the policy period. Claims which may relate to incidents occurring before the coverage was active may not be covered, although some policies may have a retroactive date, such that claims made during the policy period but which relate to an incident after the retroactive date (where the retroactive date is earlier than the inception date of the policy) are covered. Retroactive cover is usually offered as an additional option to include cover within a policy for work one has already done or services one has already provided. [2]

Coverage does not include criminal prosecution, nor all forms of legal liability under civil law, only those specifically enumerated in the policy. Unlike general liability coverage, professional liability coverage extends coverage for acts that are intentional, so long as the damages caused were not intentional. [1]

Some policies are more tightly worded than others. While a number of policy wordings are designed to satisfy a stated minimum approved wording, which makes them easier to compare, others differ dramatically in the coverage they provide. For example, a breach of duty may be included if the incident occurred and was reported by the policyholder to the insurer during the policy period. Wordings with major legal differences can be confusingly similar to non-lawyers. Coverage for "negligent act, error or omission" indemnifies the policyholder against loss/circumstances incurred only as a result of any professional error or omission, or negligent act (i.e., the modifier "negligent" does not apply to all three categories, though any non-legal reader might assume that it did). A "negligent act, negligent error or negligent omission" clause is a much more restrictive policy and would deny coverage in a lawsuit alleging a non-negligent error or omission.

Coverage is usually continued for as long as the policyholder provides covered services or products, plus the span of any applicable statute of limitations. Canceling the policy before this time would in effect make it as if the insured never had coverage for any incidents since any client could bring any case with regard to any such services or products that occurred before the statute of limitations cut-off point. A break in coverage could result in what is called a "gap in coverage", which is the loss of all prior acts.

Differences across professions

Medical profession

The negligent act is called medical malpractice and the insuring contract is called malpractice insurance.

The negligent act is called legal malpractice and the insuring contract is called lawyers professional liability insurance. or LPL [3]

Malpractice coverage is very important to attorneys because a bad case can produce a lot of bad publicity that can significantly harm a law firm's reputation. Nearly all LPL policies are claims made. Most policies will require the attorney or Insured to report any claim, alleged error, or facts that could give rise to a malpractice complaint as soon as they learn of the mistake. An Insured's coverage only goes back as far as the prior acts retroactive date. If the attorney has had constant LPL coverage from day one, it is considered "Full Prior Acts". LPL are most often written in one year "policy period". Each policy period is its own contract so the coverages may change slightly from year to year. If an insurance company makes any significant changes, they're typically required to send a "fire watch" letter to their policyholders to explain the change. Insurance companies are either admitted or non-admitted to each state.

There are five important factors to consider when purchasing LPL coverage: 1) Premium, 2) Policy Limits and Deductible, 3) Coverages and Exclusions, 4) Defense Expenses, and 5) Company Organization.

While the cost of the policy is obviously the primary factor for many law firms, careful examination is necessary to ensure that a lower premium does not correlate to less coverage. Insurance companies hire underwriters to evaluate each firm's risk based on the number of attorneys, number of staff, areas of practice, geographic regions, gross billed work, claim history, and other factors. Premiums may vary depending on the underwriter's risk appetite.

The policy limit is how much the insurance company will spend to defend covered claims. Limits are written with the per occurrence limit first and then the aggregate limit per policy period. The per policy limit is how much the company will spend on each claim and the aggregate is the limit of how much will be spent per policy period across several claims. The limits are set and do not renew every policy period.

A typical coverage is for "Professional Services" "On behalf of Another". Professional Services means the work done as an attorney, which means that driving accidents on the way to a deposition or broken desk lamps are not covered. On behalf of another means the professional service is benefiting an outside party, which means that internal law firm employment issues or defending one's own DUI are not covered. Nearly all LPL policies exclude coverage for return of professional fees, which is when the client is asking for some or all of their money back. Meritless claims still need to be reported for coverage. Many attorneys believe that vexatious litigants will go away on their own but those claims can stretch out for years.

First Dollar Defense and Defense Outside the Limits are two primary features of an LPL policy that should be looked at carefully. First Dollar Defense means that the insurance company will not apply the deductible to the defense costs. This allows the company to promptly investigate and address solvable issues. The Defense Outside the Limits refers to whether the defense costs come out of the limits or not.

Most of the large insurance companies have an LPL policy but there are also several mutual companies. A mutual insurance company is owned by its policyholders. The company will take in premiums, pay settlements and verdicts, pay their operating costs, and then return the remainder in the form of a dividend. Many state bar associations have formed their own LPL Mutual insurance company.

Insurance agents, consultants, and brokers

use the term errors and omissions (E&O) insurance Other professions that commonly purchase professional liability insurance include accounting, engineering, land surveying and financial services, construction and maintenance (general contractors, plumbers, etc., many of whom are also surety bonded), and transport. Some charities and other nonprofits/NGOs are also professional-liability insured.

This type of insurance is in fact pretty common all over the world, being considered the main risk management instrument both for individuals and companies. The regulation in force, though, may vary and there can be significant differences between a country and another; in the European Union, despite the efforts at harmonizing the rules involved in this segment of the market, every country has its own framework legislation, resulting in a wide range of options. In the recent past countries like Italy adopted a number of dispositions that introduced an obligation for every category of self employed professionals to acquire this form of insurance; such obligation has become effective only with the definition of all the parameters. Finaccord, one of the leading international market research and consulting companies, has estimated that in the first 10 countries (Austria, Belgium, France, Germany, Italy, the Netherlands, Poland, Spain, Switzerland and the United Kingdom) the total value of this branch will rise from 6.15 billion US dollars in 2009 to 7.5 billion dollars by the end of 2017. [4]

Errors and omissions insurance

Errors and omissions (E&O) insurance, which may exclude negligent acts other than errors and omissions ("mistakes"), is most often used by consultants and brokers and agents of various sorts, including notaries public, real estate brokers, insurance agents themselves, appraisers, management consultants and information technology service providers (there are specific E&O policies for software developers, home inspectors, website developers, etc.), architects, landscape architects, engineers, land surveyors, attorneys, third-party business administrators, quality control specialists, nondestructive testing analysts, and many others. A mistake which causes financial harm to another can occur in almost any transaction in many professions.

Gaps in coverage

A gap in coverage, or lapse in coverage could result from not renewing the E&O coverage the same day it expires. Several carriers[ citation needed ] who underwrite policies will not allow professionals to backdate their coverage to their expiration date without a valid explanation (such as, but not limited to: natural disaster or personal medical issue that prevented one from renewing on time) and a signed warranty letter informing the carrier the specific professional is not aware of any pending claims. For example, with an effective date of 06/01/2010 and coverage expiring on 06/01/2011 and the insured does not renew the coverage on or before 06/01/2011 then the insured may have to enroll with a gap in coverage, resulting in a loss of prior acts coverage such that there is no coverage for any business placed prior to their new effective date. Although some carriers may allow a 30- to 45-day grace period, it is common for them to disallow this.[ citation needed ]

Gaps in coverage are common in E&O coverage. A modest survey suggested most professionals are unaware what a gap in coverage is or its harsh consequences. Several professionals incorrectly believed they did not need continuous coverage if they were not writing business during specific months.

A gap in coverage should not be confused with terminating or not renewing a policy due to retirement or death. In these cases, an extended reporting policy (ERP), may be purchased.

Extended reporting policy (tail) coverage

"Tail" or "extended reporting" endorsements, known as run-off insurance or run-off cover in the UK, [5] cover events that occur while the policy is in force but are reported to the carrier after the policy terminates. The availability of extended reporting policies depends on the carrier, the specific policy, and the reason for terminating business. Certain provisions will limit the professional from writing new business during the ERP, since only past policies are generally covered in an ERP or run-off policy, nothing current or new. Many claims-made policies contain provisions to offer an extended reporting period if the policy is non-renewed. The typical tail extends the reporting period only for claims up to six months or one year after the policy expiration date. An additional premium is charged when the extended reporting option is exercised.

"Prior acts" (or "nose") coverage transfers the retro-active date for an old policy to a new insurance carrier—eliminating the need to purchase tail coverage from the last carrier. Nose coverage is usually less expensive than purchasing tail coverage from the old carrier. Tail coverage costs 2–3 times the expiring premium.

Civil liability insurance

Some policies go further than the standard coverage. Professional liability insurance coverage usually does not include defamation (libel and slander), breach of contract, breach of warranty, intellectual property, personal injury, security,[ clarification needed ] and cost of contract.[ clarification needed ] Coverage can often be added to provide indemnity "for any civil liability".

Because the operative clause of a civil liability policy is so wide, there is normally a long list of exclusions so that liabilities, like employers liability and public liability, that are the subject of other forms of insurance are not covered by the policy.

Related Research Articles

<span class="mw-page-title-main">Insurance</span> Equitable transfer of the risk of a loss, from one entity to another in exchange for payment

Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect against the risk of a contingent or uncertain loss.

<span class="mw-page-title-main">Life insurance</span> Type of contract

Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policyholder typically pays a premium, either regularly or as one lump sum. The benefits may include other expenses, such as funeral expenses.

<span class="mw-page-title-main">Vehicle insurance</span> Insurance for road vehicles

Vehicle insurance is insurance for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage or bodily injury resulting from traffic collisions and against liability that could also arise from incidents in a vehicle. Vehicle insurance may additionally offer financial protection against theft of the vehicle, and against damage to the vehicle sustained from events other than traffic collisions, such as keying, weather or natural disasters, and damage sustained by colliding with stationary objects. The specific terms of vehicle insurance vary with legal regulations in each region.

<span class="mw-page-title-main">Reinsurance</span> Insurance purchased by an insurance company

Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself from the risk of a major claims event. With reinsurance, the company passes on ("cedes") some part of its own insurance liabilities to the other insurance company. The company that purchases the reinsurance policy is referred to as the "ceding company" or "cedent". The company issuing the reinsurance policy is referred to as the "reinsurer". In the classic case, reinsurance allows insurance companies to remain solvent after major claims events, such as major disasters like hurricanes or wildfires. In addition to its basic role in risk management, reinsurance is sometimes used to reduce the ceding company's capital requirements, or for tax mitigation or other purposes.

In an insurance policy, the deductible is the amount paid out of pocket by the policy holder before an insurance provider will pay any expenses. In general usage, the term deductible may be used to describe one of several types of clauses that are used by insurance companies as a threshold for policy payments.

In insurance, the insurance policy is a contract between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.

In its broadest sense, no-fault insurance is any type of insurance contract under which the insured party is indemnified by their own insurance company for losses, regardless of the source of the cause of loss. In this sense, it is similar to first-party coverage. The term "no-fault" is most commonly used in the United States, Australia, and Canada when referring to state or provincial automobile insurance laws where a policyholder and their passengers are reimbursed by the policyholder's own insurance company without proof of fault, and are restricted in their right to seek recovery through the civil-justice system for losses caused by other parties. No-fault insurance has the goal of lowering premium costs by avoiding expensive litigation over the causes of the collision, while providing quick payments for injuries or loss of property.

Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy.

Personal injury protection (PIP) is an extension of car insurance available in some U.S. states that covers medical expenses and, in some cases, lost wages and other damages. PIP is sometimes referred to as "no-fault" coverage, because the statutes enacting it are generally known as no-fault laws, and PIP is designed to be paid without regard to "fault," or more properly, legal liability. That is, even if the person seeking PIP coverage caused the accident, they are entitled to make a claim under the PIP portion of their policy. "No-Fault" does not mean that insurance premium of the person making the claim will not increase. Typically a PIP claim is made by the insured driver to their own insurance company, however, there are several exceptions that allow persons who have been injured in an accident to make a PIP claim if they do not own a vehicle. The particular state law and policy language of the insurer should be reviewed to see what exceptions exist in that state.

Whole life insurance, or whole of life assurance, sometimes called "straight life" or "ordinary life", is a life insurance policy which is guaranteed to remain in force for the insured's entire lifetime, provided required premiums are paid, or to the maturity date. As a life insurance policy it represents a contract between the insured and insurer that as long as the contract terms are met, the insurer will pay the death benefit of the policy to the policy's beneficiaries when the insured dies.

Directors and officers liability insurance is liability insurance payable to the directors and officers of a company, or to the organization itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers. Such coverage may extend to defense costs arising from criminal and regulatory investigations or trials as well; in fact, often civil and criminal actions are brought against directors and officers simultaneously. Intentional illegal acts, however, are typically not covered under D&O policies.

An uninsured motorist clause is a provision commonly found in United States automobile insurance policies that provides for a driver to receive damages for any injury he or she receives from an uninsured, negligent driver. The owner of the policy pays a premium to the insurance company to include this clause. Although not exclusive, this coverage is typically added to an automobile insurance policy. In the event of a qualifying accident, the insurance company pays the difference between what the uninsured driver can pay and what the injured driver would be entitled to as if the uninsured motorist had proper insurance.

Insurance bad faith is a tort unique to the law of the United States that an insurance company commits by violating the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract.

Finite risk insurance is the term applied within the insurance industry to describe an alternative risk transfer product that is typically a multi-year insurance contract where the insurer bears limited underwriting, credit, investment and timing risk. The effect is similar to self-insurance by the insured as they will pay the whole amount of the risk, but can spread it out over several years. The assessment of risk is often conservative.

Expatriate insurance are insurance policies that are designed to cover financial and other risks incurred specifically by expatriates while living and working in a country other than one's own. The insurances that expatriates need are similar to individuals living in the country but may be more complex to arrange because they are not native. There may also be specific risks for high-risk areas of the world where specialty insurance can provide coverage for war and terrorism, kidnap and ransom.

MedPro Group, formerly known as Medical Protective, is a Berkshire Hathaway company and the largest provider of healthcare liability insurance in the United States. MedPro provides customized malpractice insurance, claims, and risk cover to physicians, surgeons, dentists and other healthcare professionals, as well as hospitals, senior care and other healthcare facilities. Additionally, MedPro provides insurance to international markets, liability insurance to other professionals, and specialized accident and health insurance to colleges and other businesses through its subsidiaries and other Berkshire Hathaway affiliates. MedPro is based in Fort Wayne, Indiana. MedPro’s insurance policies are distributed primarily through a nationwide network of appointed agents and brokers and supplemented by the selective use of managing general underwriters, as well as wholesale and direct channels.

Legal protection insurance (LPI), also known as legal expenses insurance (LEI) or simply legal insurance, is a particular class of insurance which facilitates access to law and justice by providing legal advice and covering the legal costs of a dispute, regardless of whether the case is brought by or against the policyholder. Depending on the national rules, legal protection insurers can also represent the policyholder out-of-court or even in-court.

A reservation of rights, in American legal practice, is a statement that an individual, company, or other organization is intentionally retaining full legal rights to warn others of those rights. The notice avoids later claims that one waived legal rights that were held under a contract, copyright law, or any other applicable law.

Cyber-insurance is a specialty insurance product intended to protect businesses from Internet-based risks, and more generally from risks relating to information technology infrastructure and activities. Risks of this nature are typically excluded from traditional commercial general liability policies or at least are not specifically defined in traditional insurance products. Coverage provided by cyber-insurance policies may include first and third parties coverage against losses such as data destruction, extortion, theft, hacking, and denial of service attacks; liability coverage indemnifying companies for losses to others caused, for example, by errors and omissions, failure to safeguard data, or defamation; and other benefits including regular security-audit, post-incident public relations and investigative expenses, and criminal reward funds.

<span class="mw-page-title-main">Vehicle insurance in France</span> Compensation-based insurance for policyholder land vehicles in France

Vehicle insurance in France is an compensation-based insurance policy for terrestrial motor vehicles that are insured in France and circulate on French territory, as well as in the European Economic Area and the Green Card zone.

References

  1. 1 2 Marcos Antonio Mendoza, The Limits of Insurance as Governance: Professional Liability Coverage for Civil Rights Claims Against Public School Districts https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3669869
  2. "Do you need professional indemnity retroactive cover?". OBF.ie. 24 May 2017. Retrieved 10 May 2018.
  3. "Negotiating Your Law Firm's Malpractice Insurance: How to Avoid Purchasing the "Never Pay Policy"". The National Law Review. Arnall Golden Gregory LLP. 2012-01-21. Retrieved 2012-04-16.
  4. "Assicurazioni professionali, continua la crescita secondo Finaccord". RCPolizza.it. 2017-01-17.
  5. Law Society, Run-off cover, published 24 February 2020, accessed 8 June 2021