Understanding Types of Professional Liability Insurance

Professional liability insurance is a crucial protection for professionals and businesses, helping to safeguard against financial losses due to mistakes or negligence.

There are several types of professional liability insurance, each designed to address specific risks and industries.

For example, errors and omissions (E&O) insurance is a common type, protecting professionals against claims of negligence or errors in their work.

This type of insurance is particularly relevant for professionals like lawyers, accountants, and consultants, who often deal with sensitive client information and complex financial transactions.

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Professional liability insurance provides businesses with coverage against clients' legal claims of negligence, malpractice, and misrepresentation.

This insurance can help cover monetary costs associated with legal fees, judgments against you, settlements, compensatory damages, punitive damages, and economic or business damages that result from a lawsuit.

It's essential to have this insurance to protect your business from financial ruin in case of a lawsuit.

Professional liability insurance can cover the costs of defending yourself against a lawsuit, as well as any damages or settlements that may be awarded against you.

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Professional liability insurance comes in various forms, each designed to protect professionals against specific risks. Medical malpractice insurance is a type of professional liability insurance that specifically protects medical professionals against claims of negligence.

Claims-made policies are a common type of professional liability insurance, providing coverage for claims made against the insured during the policy period, regardless of when the alleged error or omission occurred. This means that coverage is triggered when the claim is reported to the insurer rather than when the incident causing the claim took place.

Businesses and professionals can choose from various types of professional liability insurance, including claims-made policies, occurrence-based policies, and extended reporting periods, also known as "tail coverage." This coverage is essential for maintaining continuous protection against potential liabilities.

Here's a breakdown of the different types of professional liability insurance:

Medical professionals may be required by law to carry medical malpractice insurance, which specifically protects them against claims of negligence. Other professionals, such as accountants, architects, and consultants, may also need professional liability insurance to protect against claims of negligence or misrepresentation.

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Insurance agents, consultants, and brokers use the term errors and omissions (E&O) insurance. This type of insurance is commonly purchased by professionals in various fields.

Professions that commonly purchase professional liability insurance include accounting, engineering, land surveying, and financial services. These professionals face the risks that professional liability insurance protects against.

Some charities and other nonprofits/NGOs are also professional-liability insured. This type of insurance is considered the main risk management instrument for individuals and companies.

The regulation in force may vary between countries, resulting in a wide range of options. In the European Union, every country has its own framework legislation.

Here are some examples of professionals who commonly purchase professional liability insurance:

Professional liability insurance policies have been developed to address the unique characteristics and risks associated with various professions. These policies are designed to provide important coverage for a wide range of occupations.

Historically, professional liability insurance was bought by those in traditional professions such as accountants, lawyers, or advisors. Today, the definition of professional has expanded to include many other occupations.

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Common types of professional liability insurance policies include design-build insurance for architects and engineers, medical malpractice insurance for doctors and dentists, and technology errors & omissions insurance for technology service providers.

Other tailored policies are available for lawyers, accountants, insurance brokers, real estate brokers, and more. Miscellaneous professional liability insurance is also available for those professionals for whom the insurance industry does not have a tailored policy.

Here is a list of common types of professional liability insurance policies:

Claims-Made Coverage Triggers are a crucial aspect of professional liability insurance. A claims-made policy provides coverage for claims made against the insured during the policy period, regardless of when the alleged error or omission occurred.

This means that coverage is triggered when the claim is reported to the insurer rather than when the incident causing the claim took place. The policy in force at the time the claim is made responds to the claim, regardless of when the professional services were rendered.

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The retroactive date, also known as the retroactive or prior acts date, is a critical component of a claims-made policy. It specifies the point from which coverage applies for claims arising from past acts, errors, or omissions. Claims arising from acts or services performed before the retroactive date are typically excluded from coverage, regardless of when the claim is made.

Insureds should carefully consider the retroactive date when purchasing coverage to ensure adequate protection for past activities. Maintaining continuous coverage is essential under a claims-made policy to ensure uninterrupted protection against potential liabilities.

Gaps in coverage, such as canceling a policy without replacing it with a new claims-made policy or failing to renew coverage, can leave insureds exposed to claims for which they have no insurance protection. Insureds should be proactive in renewing their policies and avoid coverage lapses to maintain continuous coverage.

Extended reporting periods, also known as "tail coverage", are offered by insurers to address the potential gap in coverage that may occur when switching from one claims-made policy to another or when retiring or leaving a profession. These periods allow insureds to report claims for incidents that occurred during the policy period but were reported after the policy has expired or been canceled.

Here's a summary of the key points to keep in mind when it comes to claims-made coverage triggers:

Chubb is a top choice for professional liability insurance, especially for small businesses. It received high marks from NerdWallet for its financial strength.

Chubb's online platform makes it easy for businesses with less than $1 million in revenue to buy policies. This convenience sets it apart from other insurance providers.

Chubb ranked second-highest for customer satisfaction in J.D. Power's 2022 U.S. Small Commercial Insurance Study. This speaks to the company's commitment to customer care.

You can learn more about Chubb's small-business insurance by reading NerdWallet's review.

Hiscox is a great option for businesses that do work outside the U.S. Their professional liability insurance policy covers work done overseas as long as the claim is filed in the U.S. or Canada.

You can get a quote online and some businesses might be able to complete their purchase online.

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Ordinary vs Negligence is a key distinction in determining liability.

Ordinary negligence is a type of liability that applies when a business or individual fails to exercise the same level of care that a reasonable person would. This can result in physical or financial harm to a client.

For example, if a client slips and falls on a sidewalk in front of a business, the business can be sued for ordinary negligence.

A professional's duty of care is higher than that of a reasonable person. This is known as professional negligence.

There are two methods for measuring a professional's duty of care: foreseeability tests and multifactor tests.

Foreseeability tests determine if a professional could have reasonably predicted that their actions would cause harm to a client.

Multifactor tests evaluate several factors, including the extent of the damages, the possibility of taking another action, the cost of taking that other action, and the safety of alternative options.

Examples of professional negligence include an accountant failing to file a client's tax return on time and a real estate agent failing to notify a buyer of a defect in the home.

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Professional liability insurance policies are typically set up on a claims-made and reported basis, covering claims made and reported during the policy period. This means that if a claim is made after the policy has ended, it may not be covered.

Some policies offer retroactive cover, which includes coverage for work done or services provided before the policy began. This is usually an optional extra. Criminal prosecution is not included in professional liability coverage, only the specifically enumerated forms of legal liability.

Professional liability policies often feature shrinking limits, which means that defense costs reduce the available policy limits. This is different from CGL insurance, where defense costs don't typically reduce policy limits.

Here are some common exclusions in professional liability policies:

Professional liability policies usually continue to cover the policyholder as long as they provide covered services or products, plus the span of any applicable statute of limitations. Canceling the policy before this time can result in a "gap in coverage", which means the loss of all prior acts.

Professional liability policies come with several key features that distinguish them from other types of insurance coverage. Most operate on a claims-made basis, meaning coverage is triggered when a claim is made against the insured during the policy period, regardless of when the alleged error or omission occurred.

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Claims-made policies often feature shrinking limits, which means the insurer's payment of defense costs reduces the available policy limits. This contrasts with CGL insurance, where defense costs do not typically reduce policy limits.

A critical component of a claims-made policy is the retroactive date, also known as the retroactive or prior acts date. This date specifies the point from which coverage applies for claims arising from past acts, errors, or omissions.

Claims arising from acts or services performed before the retroactive date are typically excluded from coverage, regardless of when the claim is made. Insureds should carefully consider the retroactive date when purchasing coverage to ensure adequate protection for past activities.

Some policies offer extended reporting periods, also known as "tail coverage", to address the potential gap in coverage that may occur when switching from one claims-made policy to another or when retiring or leaving a profession.

Here are some common exclusions found in professional liability policies:

These exclusions may limit coverage under certain circumstances, so it's essential to review your policy carefully and understand what is and isn't covered.

Professional liability insurance policies are typically set up on a claims-made and reported basis, covering claims made and reported during the policy period for errors, omissions, or negligent acts committed during that time.

The policy period is crucial, as claims related to incidents before the coverage was active may not be covered, unless the policy has a retroactive date. This date allows coverage for incidents that occurred after the retroactive date, even if the policy was not active at the time.

Coverage usually continues 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 can result in a "gap in coverage", which is the loss of all prior acts.

Some policies are more tightly worded than others, with varying levels of coverage for acts that are intentional. A breach of duty may be included if the incident occurred and was reported during the policy period.

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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. A "negligent act, negligent error or negligent omission" clause is much more restrictive, denying coverage in lawsuits alleging a non-negligent error or omission.

Here are some common exclusions in professional liability policies:

A PLI policy may be available on an occurrence or a claims made basis. If the policy is written on an occurrence basis, claims will only be considered for coverage if the event that gave rise to a claim happened during the policy period.

Claims made during the policy period are the only ones covered under a claims-made policy. This means the event that gave rise to the claim may have occurred during or before the policy period.

Professional liability insurance often provides an extended reporting period, which covers claims that occur within a certain time after the policy expires, typically 30 to 60 days. This gives you some extra time to report any claims that arise after the policy period ends.

Here are the key differences between occurrence and claims-made policies:

A claims example can be a costly and complex situation, as we see in the case of the architect who made a design error. The cost of rectifying the structure to bring it up to code was $85,000.

The building owner sued the architect for professional negligence, resulting in financial damage to the third party. The damage was the additional cost incurred to rectify the construction.

Professional liability claims arise when a professional is legally required to pay for damages or wrongful acts. This can include defence costs, judgments, settlements, damages, or fines.

Here are some key points to keep in mind when it comes to claims and reporting:

Claims reporting basis is a critical aspect of professional liability insurance. A policy can be written on either an occurrence or claims-made basis.

If a policy is written on an occurrence basis, claims will only be considered for coverage if the event that gave rise to a claim happened during the policy period. This type of policy is said to have 'long-tail liability' because claims can be reported at any time, even long after the policy period has ended.

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Claims-made policies, on the other hand, only cover claims made during the policy period. The event that gave rise to the claim may have occurred during or before the policy period.

Here are the key differences between occurrence and claims-made policies:

If a claims-made policy is not renewed, or expired, the professional is out of coverage. This is why it's essential to understand the claims reporting basis of your policy to ensure you have adequate coverage when you need it.

Showing Policy Proof is a crucial step in the claims and reporting process. You'll need to provide proof of professional liability insurance to your clients or to verify coverage.

A certificate of insurance (COI) is what you'll typically need to show proof of insurance. A COI contains important information about your insurance policy.

The COI should include the name of the policyholder, which is you or your business. The effective date of the policy is also crucial, as it shows when your coverage started.

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The type of coverage involved and the policy's limits are also essential details to include in the COI. This information will help verify that you have the specific coverage you need.

Here are the key details a COI should include: