Professional liability insurance

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 enumerate 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 consultants, brokers and lawyers. Other professions that commonly purchase professional liability insurance include accounting and financial services, construction and maintenance (general contractors, plumbers, etc., many of whom are also surety bonded), and transport. Some charities and othernonprofits/NGOs are also professional-liability insured.

Rationale

The primary reason for professional liability coverage is that a typical general liability insurance policy will only respond to a bodily injury, property damage, personal injury or advertising injury claim. Other forms 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 damages, or personal or advertising injuries, 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 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.

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,website developers, etc.), architects and engineers, attorneys, 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.^[1]

Gaps in coverage for E&O Claims Made Policies

A gap in coverage, or lapse in coverage could be the result from not renewing the professionals 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, an effective date may be 06/01/2010 and your coverage may expire on 06/01/2011, if the professional does not renew your coverage on or before 06/01/2011 then the professional may have to enroll with a gap in coverage, resulting in a loss of prior acts coverage, meaning the professional will have 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 not aware of what a gap in coverage really is, or its harsh consequences. Several professionals agreed that they believed since they were not writing business during specific months, they did not need to keep coverage continuous, although this is not the case and will result in a gap and loss of prior acts coverage.

A gap in coverage should not be confused with not renewing a policy due to retirement, or death as an Extended Reporting Policy may take place in this scenario. A professional will want to verify what Extended Reporting Policies (ERP) are available for their specific policy in the event of retirement, termination, death or other unspecified scenarios, as they will differ between carriers and policies. Certain provisions will limit the professional from writing new business during the ERP, since only past policies are generally covered in an ERP policie, nothing current or new.

Civil liability insurance

Some policies go further than the standard coverage. Professional liability insurance coverage usually does not include defamation (libel andslander), breach of contract, 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.