Unless you’re an attorney, doctor or accountant, it may not be obvious to you that you may need professional liability insurance.
Forty percent of businesses believe they may have professional liability risks but have not purchased insurance for it, according to a recent survey of small business owners by The Hanover Insurance Company.
Over the past twenty years there have been many changes in the ways businesses interact with customers and they may be surprised to discover they now have a gap in their liability coverage. Many businesses don’t realize that their general liability does not cover professional liability (PL) exposures.
In addition to lawyers, doctors and accountants, many businesses now 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 ice sculptor. A socially prominent couple contracts with an ice sculptor to provide a figure of two swans for their very expensive wedding. When the sculpture is unveiled, the bride gasps—the swans look like ducks. She claims this mistake ruined her wedding and threatens to sue, not just for the cost of the sculpture, but for the cost of the entire reception.
One of the most important reasons to carry professional liability (also referred to often as errors and omissions) insurance coverage is for defense costs. Even if the ice sculptor can prove that the client signed off on the design before it was unveiled, and it did indeed look like swans, the cost to defend the lawsuit could put a small organization 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You can find the most extreme examples of costly lawsuits in the medical field, where 65 percent of claims are withdrawn before trial and 90 percent of claims that go to trial are denied, according to the Physicians Insurance Association of America.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.
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.
Examples of other professionals who need protection include:
- Real estate agents
- Data processors
- Pest control services
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, publishers, 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.
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 coverage for your business, please give us a call.