Professional Liability Insurance Versus Errors & Omissions

What do an ice sculptor and a real estate agent have in common? If they have insurance to protect themselves from the costs of mistakes they make in the course of providing their services, they likely have errors and omissions (E&O) coverage.

The commercial general liability policy does not cover professional liability. So your doctor and attorney have malpractice insurance (or we hope they do!) to protect themselves against lawsuit if they make a mistake in the course of offering professional services. While other professionals’ work might not have the life and death import of a doctor’s, they still can cause bodily, financial or reputational harm to others if they make a mistake. What type of insurance protects them from this risk exposure?

Historically, insurance for professionals such as lawyers was called professional liability (PL). 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 they do not cover property damage — which is typically covered under your general liability policy. Most PL and E&O policies exclude coverage for bodily injury — with a key exception being 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 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. Defense Costs One of the most important reasons to carry E&O coverage is for defense costs. Even if our 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. 65 percent of medical 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. Tailored Coverage 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
• Accountants
• Pest control services
• Appraisers

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.

Claims-Made Policy

It is important to understand that most PL and E&O policies are written as “claimsmade.” Claimsmade 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.