Professional liability insurance
Encyclopedia
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
that 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 potential 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 coverage sometimes also provides for the defence 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 (especially medical and legal), and is also sometimes required under contract by other businesses that are the beneficiaries of the advice or service.
Professional liability insurance may take on different forms and names depending on the profession. For example, in reference to medical professions it is called malpractice insurance, while errors and omissions (E&O) insurance is used by consultant
s, broker
s and lawyer
s. Other professions that commonly purchase professional liability insurance include accounting and financial services
, construction
and maintenance (general contractor
s, plumber
s, etc., many of whom are also surety bond
ed), and transport. Some charities
and other nonprofits
/NGOs are also professional-liability insured.
policy will only respond 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. For example, 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.
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 and 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, breach of duty may be included if the incident occurred and was reported by the policy holder 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
. Cancelling 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.
s and brokers and agents
of various sorts, including notaries public
, real estate broker
s, insurance agents themselves, appraiser
s, management consultants and information technology
service providers (there are specific E&O policies for software developers
, website developer
s, etc.), architects and engineers
, attorney
s, 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 are common in E&O coverage. A modest survey suggested that most professionals are unaware of what a gap in coverage really is or its harsh consequences. Several professionals agreed that they incorrectly believed since they were not writing business during specific months, they did not need continuous coverage.
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. 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 policy, nothing current or new.
"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.
, breach of warranty, intellectual property
, personal injury
, security, and cost of contract. 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 the policy.
Liability insurance
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. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy...
that helps protect professional advice- and service-providing individuals and companies from bearing the full cost of defending against a negligence
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...
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 potential 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 coverage sometimes also provides for the defence 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
Civil law
Civil law may refer to:* Civil law , a branch of continental law which is the general part of private law* Civil law , a branch of common law dealing with relations between individuals or organizations...
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 (especially medical and legal), and is also sometimes required under contract by other businesses that are the beneficiaries of the advice or service.
Professional liability insurance may take on different forms and names depending on the profession. For example, in reference to medical professions it is called malpractice insurance, while errors and omissions (E&O) insurance is used by consultant
Consultant
A consultant is a professional who provides professional or expert advice in a particular area such as management, accountancy, the environment, entertainment, technology, law , human resources, marketing, emergency management, food production, medicine, finance, life management, economics, public...
s, broker
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
s and lawyer
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
s. Other professions that commonly purchase professional liability insurance include accounting and financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
, construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
and maintenance (general contractor
General contractor
A general contractor is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and communication of information to involved parties throughout the course of a building project.-Description:...
s, plumber
Plumber
A plumber is a tradesperson who specializes in installing and maintaining systems used for potable water, sewage, and drainage in plumbing systems. The term dates from ancient times, and is related to the Latin word for lead, "plumbum." A person engaged in fixing metaphorical "leaks" may also be...
s, etc., many of whom are also surety bond
Surety bond
A surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract...
ed), and transport. Some charities
Charitable organization
A charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...
and other nonprofits
Nonprofit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
/NGOs are also professional-liability insured.
Rationale
The primary reason for professional liability coverage is that a typical general liability insuranceLiability insurance
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. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy...
policy will only respond to a bodily injury, property damage, personal injury or advertising injury claim. Other forms of insurance cover employers, public
Public liability
Public liability is part of the law of tort which focuses on civil wrongs. An applicant usually sues the respondent under common law based on negligence and/or damages...
and product liability
Product liability
Product liability is the area of law in which manufacturers, distributors, suppliers, retailers, and others who make products available to the public are held responsible for the injuries those products cause...
. 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
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...
, misrepresentation
Misrepresentation
Misrepresentation is a contract law concept. It means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality...
, violation of good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
and fair dealing
Fair dealing
Fair dealing is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work, which is found in many of the common law jurisdictions of the Commonwealth of Nations....
, and inaccurate advice. For example, 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.
Coverage
Professional liability insurance policies are generally set up based on a claims-made basis, meaning that the policy only covers 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 neglect, error or omission 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.Coverage does not include criminal prosecution, nor all forms of legal liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
under civil law
Civil law
Civil law may refer to:* Civil law , a branch of continental law which is the general part of private law* Civil law , a branch of common law dealing with relations between individuals or organizations...
, only those specifically enumerated in the policy.
Some policies are more tightly worded than others and 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, breach of duty may be included if the incident occurred and was reported by the policy holder 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
Statute of limitations
A statute of limitations is an enactment in a common law legal system that sets the maximum time after an event that legal proceedings based on that event may be initiated...
. Cancelling 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.
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 consultantConsultant
A consultant is a professional who provides professional or expert advice in a particular area such as management, accountancy, the environment, entertainment, technology, law , human resources, marketing, emergency management, food production, medicine, finance, life management, economics, public...
s and brokers and agents
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
of various sorts, including notaries public
Notary public
A notary public in the common law world is a public officer constituted by law to serve the public in non-contentious matters usually concerned with estates, deeds, powers-of-attorney, and foreign and international business...
, real estate broker
Real estate broker
A real estate broker, real estate agent or realtor is a party who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy...
s, insurance agents themselves, appraiser
Appraiser
An appraiser , is one who sets a value upon property, real or personal. In England the business of an appraiser is usually combined with that of an auctioneer, while the word itself has a similar meaning to that of "valuer." In the United States, the most common usage relates to real estate...
s, management consultants and information technology
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
service providers (there are specific E&O policies for software developers
Software development
Software development is the development of a software product...
, website developer
Web developer
A web developer is a software developer or software engineer who specializes in, or is specifically engaged in, the development of World Wide Web applications, or distributed network applications that are run over HTTP from a web server to a web browser....
s, etc.), architects and engineers
Engineering
Engineering is the discipline, art, skill and profession of acquiring and applying scientific, mathematical, economic, social, and practical knowledge, in order to design and build structures, machines, devices, systems, materials and processes that safely realize improvements to the lives of...
, attorney
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
s, third-party business administrators, quality control
Quality control
Quality control, or QC for short, is a process by which entities review the quality of all factors involved in production. This approach places an emphasis on three aspects:...
specialists, nondestructive testing
Nondestructive testing
Nondestructive testing or Non-destructive testing is a wide group of analysis techniques used in science and industry to evaluate the properties of a material, component or system without causing damage....
analysts, and many others. A mistake which causes financial harm to another can occur in almost any transaction in many professions.
Gaps in coverage for E&O claims made policies
A gap in coverage, or lapse in coverage could result from not renewing the E&O coverage the same day it expires. Several carriers who underwrite policies will not allow professionals to backdate your coverage to your expiration date with out a valid explanation (such as, but not limited to: natural disaster or personal medical issue that prevented your 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 - 45 day grace period, it is not uncommon for them to not allow this.Gaps in coverage are common in E&O coverage. A modest survey suggested that most professionals are unaware of what a gap in coverage really is or its harsh consequences. Several professionals agreed that they incorrectly believed since they were not writing business during specific months, they did not need continuous coverage.
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. 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 policy, nothing current or new.
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. Purchasing tail coverage from the present carrier effectively converts the claims-made policy into an occurrence policy."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 contractBreach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
, breach of warranty, intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
, personal injury
Personal injury
Personal injury is a legal term for an injury to the body, mind or emotions, as opposed to an injury to property. The term is most commonly used to refer to a type of tort lawsuit alleging that the plaintiff's injury has been caused by the negligence of another, but also arises in defamation...
, security, and cost of contract. Coverage can often be added to provide indemnity
Indemnity
An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor may or may not be responsible for the loss suffered by the indemnitee...
"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
Public liability
Public liability is part of the law of tort which focuses on civil wrongs. An applicant usually sues the respondent under common law based on negligence and/or damages...
, that are the subject of other forms of insurance are not covered the policy.