|November/December 2010 Volume 22, Number 6|
Professional Liability Versus Errors & Omissions
What is the difference between professional liability and errors and omissions insurance? Who needs this coverage, and what protections does it provide?
If you’re a little fuzzy about the difference between professional liability (PL) and errors and omissions (E&O) insurance, you’re not alone.
Here is an industry definition (from IRMI) of professional liability: Coverage designed to protect traditional professionals (e.g., physicians) and quasi-professionals (e.g., real estate brokers) against liability incurred as a result of errors and omissions in performing professional services for clients or customers.
Historically, insurance for professionals such as lawyers was called professional liability; policies for quasi-professionals were labeled E&O. However, insurance companies now tend to use the terms interchangeably.
Both PL and E&O policies cover economic losses suffered by third parties but not property damage — which is typically covered under your general liability policy. Most PL and E&O policies exclude coverage for bodily injury — with the key exception of professional liability/medical malpractice for doctors.
Who Needs Coverage?
In addition to lawyers, doctors and accountants, many businesses need PL insurance. You don’t have to consider yourself a “professional” to need coverage for negligent acts. If you give advice and recommendations, if you create programs or products for your customers or if you provide a service, you need liability protection.
Take, for instance, an interior designer. In the subjective world of interior design, one person’s beautiful kitchen is another person’s disaster. The opportunities for misunderstandings and errors abound. If the client says the wrong materials were used, a costly lawsuit is possible.
Examples of other professionals who need protection include:
Whether you buy a PL or E&O policy, it usually will be tailored to the specific needs of your business classification. For instance, a policy for real estate brokers typically includes coverage for failure to advise clients on the existence of fungus, asbestos or bacteria. Policies for accountants might provide coverage for acting as a trustee or administrator of an estate. Some policies also cover inadvertent transmission of computer viruses and corruption of customers’ data.
Many insurance companies offer group policies to members of trade associations. In other cases, insurance companies form buying pools that professionals can “join.” Miscellaneous professional liability coverage is also available for a variety of businesses such as translators, meeting planners and collection agencies. If you need coverage, we can advise you on the best approach.
Sole proprietors may choose to protect their personal assets by forming a limited liability company, but their corporate assets are still at risk unless they buy E&O coverage.
One of the most important reasons to carry E&O coverage is for defense costs. Even if our interior designer can show that the client signed off on the materials and the schedule, the cost to defend the lawsuit could put a small business out of business.
You can find the most extreme examples of costly lawsuits in the medical field, where 65 percent of claims are withdrawn before trial and 90 percent of claims that go to trial are denied, according to the Physicians Insurance Association of America. Nonetheless, it costs an average of $120,000 to defend frivolous cases.
It is important to understand that most PL and E&O policies are written as “claims-made,” which means the policy only covers claims filed during the policy period. A few companies offer occurrence-based policies, which cover any qualifying claim arising from an incident that occurred during the policy period—no matter when filed. If you switch from a claims-made to an occurrence policy, you have to make sure you don’t create a gap in coverage.
In specific situations, a claims-made policy may allow an extended period for reporting claims: when an insured dies, retires or becomes permanently disabled. This is an important feature, because new claims can be filed years after the policy period. To qualify as a retiree, the insured usually has to be at least 55 years old, and he/she has had to maintain coverage with the same insurance company for several years — something to plan for if retirement is in your near future.
If you have any concerns about the liability coverages for your business, please give us a call.