Professional Liability Insurance | E&O – When Do You Need It?
Professional Liability insurance, errors and omissions, E&O, and malpractice insurance all fall into a similar bucket of coverage and are designed to protect an insured from claims which can arise from providing professional advice or services to clients.
In this video and post, I’m going to explain professional liability insurance or E&O insurance in detail and when you as a professional need it.
Professional Liability or E&O insurance, where to start?
I think the first step is to define what a professional is in the context of the law and with regard to insurance.
A professional is any person or firm that provides advice, guidance, or services to others that requires specialized knowledge or skills that the general public does not possess.
Usually, there is some form of licensing required to perform those services or specialized training or education.
So, thinking about that statement the professionals that come to mind may be lawyers, accountants, real estate brokers, insurance brokers, consultants, financial advisors, stockbrokers, engineers, designers, architects.
An entirely different area of professionals includes personal services such as barbers, beauticians, massage therapists, etc.
You may be asking why I didn’t mention doctors, dentists, surgeons, veterinarians, and other medical-related professionals?
That’s because medical malpractice and related fields are a bit different than what I’m covering here.
There are also E&O policy forms for technology companies that cover claims arising from errors and omissions in technology products and services. Also in the same bucket, but a bit different than the focus of this video.
The other point I want to bring up is the difference between general liability and professional liability and why you may need both types of policy forms.
General liability covers an insured for claims which arise out of bodily injuries, property damages, and personal injuries – that includes things like advertising injury, libel, slander, etc.
Professional Liability on the other hand strictly excludes claims for bodily injury and property damage.
There is some gray cross-over on the personal injury issue, but that changes from policy form to policy form so it’s a bit complicated to go into here. The key issue for professional liability insurance is that it covers claims which arise from providing professional services, advice, or guidance which results in a client suffering financial harm.
The point is that most professional service firms will need both policy forms because they cover two different types of claims.
Take as an example a consultant – it can be any sort of consulting firm providing professional advice to their clients – they have an office and a client visiting their office slips and falls on a wet floor, injuring themselves.
They sue the consultant for their injuries, pain, and suffering for $1 million. Here the general liability policy will respond to this claim. A similar claim can even happen if the consultant doesn’t have an office and only works remotely or visits clients on occasion.
The second type of claim for a consultant can be something like this scenario. A management consultant advises a client to make certain changes in their business to improve profitability, which the client deploys. A year later the client’s business is in worse financial condition and files bankruptcy. The client sues the consultant for bad advice which led to the bankruptcy and the financial damages they incurred.
In the second claim, there was no evidence or claim for bodily injury or property damage – the claim focuses on the bad advice which led to the client suffering financial damages.
When do you need Professional Liability or E&O Insurance?
That’s a good question, and there are several answers to it.
First, you may be forced to purchase E&O or professional liability insurance by your customers when entering into a contract.
In fact, many new customers approach us for E&O coverage when they’ve landed their first big contract and the customer is mandating professional liability or E&O insurance.
The client may never have considered this insurance, but now they must get it to satisfy the customer’s contract demands. And, it’s certainly important for them to have it for potential claims that could arise from this engagement and other engagements as well.
Second, you need professional liability insurance or E&O when your business fits that category of providing professional services I described earlier because your business owners or general liability insurance will not cover claims which arise from errors or omissions you make in providing services to clients.
What’s covered under a Professional Liability policy or E&O Insurance policy?
The first and most critical part of professional liability insurance is defense costs. I’ve had many clients say, “I’ll never be sued for professional liability and if I did, the claim would never be successful.”
I may not agree with that statement, but this is where defense protection comes into play. Many E&O-type claims eventually may be dismissed but getting to that dismissal is going to cost a lot of money in lawyers fees and other costs, and that is covered under an E&O policy. Typically there is a deductible or retention which is what you will pay out of pocket before the insurance company pays, but after that, the insurer picks up defense costs.
Second, obviously are settlement costs which are the amounts you must pay to settle a claim. Settlements can be big, so buying sufficient coverage is important.
An important footnote here is that most E&O policies are written on a claims-made policy form and you can see more about that in my video, Claims-Made, Retroactive Dates, and Continuity in D&O Insurance Explained but a key provision in most claims-made forms is that defense costs are part of your limit of liability – meaning that they reduce the available limit of coverage from your policy.
If you have a $1 million limit of E&O insurance and a claim incurs $500,000 of defense costs, that means you’ll only have $500,000 left in the policy for settlements.
For this reason, it’s important to purchase high limits of protection.
Today, it seems like the different types of specialized advisors and consultants that others are willing to pay for their specialized knowledge are ever-growing and expanding.
Earlier I mentioned professionals like accountants, attorneys, and several other types of professionals, and most of them are insured on specialized policy forms specifically written around that profession such as a lawyer’s professional liability policy. Or a real estate broker’s E&O policy.
But, what about all those unique consultants and other professional service providers?
That’s where this gets a bit tricky and needs some unique handling. In the insurance business, we call that MPL or Miscellaneous Professional Liability insurance.
And the tricky part is getting the definition of professional services right so that all potential claims are covered.
Sometimes this is a negotiating game between a broker and an underwriter in order to define professional services broadly enough to cover the types of claims that can arise from the insured’s profession.
Okay to wrap it up.
As you can see the different types of professionals, advisors, and consultants that need E&O insurance of professional liability insurance is pretty broad.
Many traditional professional categories have their own specific coverage forms and broad categories of consultants and advisors may fall under the Miscellaneous Professional Liability policy form.
Regardless of what type of profession or policy form you may be,
I think the key to getting your protection right is to work with an expert insurance broker who understands the nuances of different policies as well as has a broad knowledge of the marketplace, and can help you find the right protection tailored to your needs at a competitive premium.
If that’s what you’re looking for, I can help you.
With over 40 years of experience in the commercial insurance business and 4 professional designations, I focus on unique coverage forms like E&O professional liability insurance for a wide range of professionals.
Give me a call, drop me an email. Let’s have a conversation – I promise no hardcore selling – just a chat to see if we might be a good fit for you and your business insurance needs.