For accountants, lawyers, and consultants, professional liability is most likely the largest exposure. Professional liability is often the most important policy to procure for a business, helping build the foundation for growth.
What Professional Liability Covers
Professional liability insurance, errors and omissions, and malpractice insurance all fall into a similar bucket of coverage, designed to protect an insured from claims that can arise from providing professional advice or services to clients.
A professional is any person or firm that provides advice, guidance or services to others that require specialized knowledge or skills the general public does not necessarily possess.
Liability Insurance For Professionals
Usually there is some form of licensing required, or specialized training and education. Professionals include lawyers, accountants, real estate brokers, insurance brokers, consultants, financial advisors, stock brokers, engineers, designers and architects. Personal services include barbers, beauticians, massage therapists, personal or life coaches.
Professional Liability vs. General Liability
General liability covers an insured for claims which arise out of bodily injury, property damage, and personal injury, including things like advertising injury, libel, and slander.
Professional liability, on the other hand, strictly excludes claims for bodily injury and property damage. The key issue with professional liability insurance is that it covers claims arising from professional services, advice, or guidance that result in a client suffering financial harm.
Most professional service firms will need both policy forms because they cover two different kinds of claims. A client visiting an office and slipping on a wet floor would be covered by general liability. A consultant advising a client to make certain changes that lead to bankruptcy, with the client suing over bad advice, would be covered by professional liability.
Why the Policy Language Matters More Than the Title
There is a very generic title to this policy that everyone uses, errors and omissions professional liability, but the actual language underneath is what determines whether or not coverage exists, not the title of the policy.
It’s important to be up front and honest about everything done in consulting work, so the agent and carrier have the full spectrum idea of the work involved. Standard management consulting is fairly straightforward, but for more nuanced areas, like technology consulting, a technology professional errors and omissions policy may be needed versus a standard one.
For professional services like engineering, accounting, or legal work, specific nuances inside those policies may need to be added back in or specifically written to match the work being done.
The definition of Professional Services in a professional liability policy is the most important element of that policy. Most policy language starts with an insuring agreement that says the insurer shall pay a loss resulting from a Professional Services claim, and Professional Services is a defined term found in the policy declaration.
In one situation, a digital marketing agency’s policy defined Professional Services as market research services, which did not correlate to the services that the client actually provided.
When Coverage Is Needed
Coverage may be forced by customers when entering into a contract, with many new customers approaching brokers for coverage after landing their first big contract.
Coverage is also needed because a business’s general liability insurance is not going to cover claims that arise from errors and omissions made in providing services to clients.
What’s Covered Under the Policy
The first and most critical part of professional liability insurance is defense costs. Many claims eventually may be dismissed, but getting to that dismissal costs a lot of money in lawyers’ fees and other costs, which is covered under the policy.
Typically, there is a deductible or retention paid out of pocket before the insurance company pays, after which the insurance company picks up defense costs 100 percent. Settlement costs are the amounts that must be paid to settle a claim, and settlements can be big, so buying sufficient coverage is important.
Most policies are written on a claims-made policy form, where defense costs are included in the limit of liability, reducing the available limit of coverage as defense costs are expended.
A million-dollar limit with half a million dollars of defense costs leaves only half a million dollars left for settlements, which is why purchasing high limits of protection matters.
Finding the Right Coverage
Many traditional professional categories have their own specific coverage forms, while a broad category of consultants and advisors may fall under the miscellaneous professional liability policy form, where getting the definition of professional services right is critical so that all potential claims are covered.
If an insured is a Professional Services Company, professional liability insurance is needed, tailored and customized to specific needs and operations.
