Insurance Just Made for you

Professional Liability

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 advice- and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such 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.

Coverage sometimes 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.

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. But 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 fair dealing, and inaccurate advice. Examples:

  • If a software product fails to perform properly, it may not cause physical, personal, or advertising damages, therefore the general liability policy would not be triggered; it may, however, directly cause financial losses which could potentially be attributed to the software developer’s misrepresentation of the product capabilities.
  • If a custom-designed product fails without causing damage to person or property other than to the subject product itself, a product liability policy may cover consequential damages such as losses from business interruption, but will generally not cover the cost to redesign, repair or replace the failed product itself. Claims for these losses against the manufacturer may be covered by a professional liability policy.

Professional liability insurance policies are generally set up based on a claims-made basis, meaning that the policy covers only those claims made during the policy period. 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 your policy for work you have already done or services you have already provided.

Coverage does not include criminal prosecution, nor all forms of legal liability under civil law, only those specifically enumerated in the policy.

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.

Defense outside the Limits policies are more expensive and their benefit is often exaggerated because it limits available funding from being used for settlements and verdicts. Higher policy limits are more effective.

Company Organization

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. Make sure that the mutual has a healthy reserve so that they’ll be around for several years. The claim department is the product that you’re buying so take a minute to determine; how easy it is to get someone on the phone, whether the claim department employs attorneys to handle the claims, and who the claim attorneys hire as defense counsel. 

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 the like of 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. 

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, engineersland surveyorsattorneys, third-party business administratorsquality 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.

Extended Reporting Period (Tail) Coverage

“Tail” or “extended reporting” endorsements cover events that occur while the policy is in force but are reported to the carrier after the policy terminates. 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 6 months or one year after the policy expiration date. An additional premium is charged when the extended reporting option is exercised.