February 2012: Professional Liability

  * Is any aspect of your operation – no matter how minor – deemed a “professional service”?

* Will your general liability policy respond to claims arising from “professional services”?

  * Can a client hold you responsible for a financial loss even if their property hasn’t suffered a     physical loss?

  * Could you be faced with defending your business against a groundless “failure to perform” claim?

Even with implementation of all the right practices — procedures, checks and balances, continuing education to stay current with industry changes, etc. — the possibility of an error still exists. Anyone can make an honest mistake when completing a transaction, performing a procedure, providing consultation, or drafting a design for your client. These errors can result in physical damage to another individual or property of others, financial loss to your client, threaten your on-going relationship with the client, and negatively affect your reputation within your industry.

What is a “Professional” exposure?

Professional liability exposures arise primarily from giving inaccurate advice and/or rendering or failing to render professional services whether done directly by your business or via third parties that you hire. These incidents often do not result in physical, personal, or advertising damage but rather a financial loss caused by negligence, misrepresentation, inaccurate advice, design error, violation of good faith and fair dealing, etc.

Who is likely to have a “Professional” exposure?

  • Accountants/Bookkeepers
  • Appraisers
  • Architects
  • Attorney/Legal Counsel
  • Career Counselors
  • Consultants including Financial Planners
  • Contractors offering any design services
  • Event Planners
  • Funeral Directors
  • General Contractors /Project Managers
  • Graphic and Interior Designers
  • Hair Stylist, Manicurist
  • Human Resource Service
  • Insurance Agents
  • Investigators
  • IT/Technology
  • Manufacturers providing design services
  • Marketing & Advertising Agencies
  • Medical & Billing Code Services
  • Medical (doctors, nurses, physical therapist, etc.)
  • Property Managers
  • Real Estate Agents & Brokers
  • Recruitment Consultant
  • Speakers/Lectors
  • Staffing Agencies
  • Secretarial Services
  • Training /Tutoring Services
  • Travel Agents
  • Veterinarians
  • Transportation / Delivery

Does my General Liability policy cover “Professional” claims?

Professional liability claims are often a result of a financial loss rather than actual damage to property or injury to others. There is no coverage provided under General Liability policies for losses of a financial nature that arise out of your performing or failure to perform professional services.
General Liability policies cover losses caused by your negligence and resulting in bodily injury, death, or damage to physical property of others. These losses usually originate from premises you own, rent, or occupy and/or a product you sell or a service you provide to the public.
A separate Professional Liability policy is usually required to provide the needed coverage for your professional exposures.

What insurance coverage is available?

For businesses or individuals with a professional liability exposure, Professional Liability insurance – often referred to as Errors and Omissions (E&O) or Malpractice Insurance – provides not only vital protection of financial assets but also defense against professional service negligence allegations.

Professional Liability coverage provides insureds with defense against allegations, lawsuits, etc. even when they initially appear to be groundless. Coverage not only pays for the cost of defense but also provides the insured with access to attorneys that specialize in defending against such allegations.

Depending on the nature of operations, some states require Professional liability insurance particularly for those in the medical or legal field. This coverage is also often required by contracts with businesses that hire you for advice or service. Likewise, should you hire a firm to provide professional services, you should require this coverage be carried and proved to you via an insurance certificate.

Professional liability insurance policies are generally on a claims-made basis, meaning the policy only covers claims made during the policy period for incidents occurring after the retroactive date. The retroactive date is usually the date that coverage was first obtained as long as there is no gap in coverage. If a gap occurs, the retroactive date then becomes the date coverage is re-obtained leaving the business uninsured for claims that may arise for incidents occurring prior to the new retroactive date. It is important that businesses do not let this coverage lapse while operations creating this exposure are still ongoing.

Even when a business ceases operations, the potential for a claim still exist as any client could bring a suit due to prior services or products as long as done before the statue of limitations cut-off point. To have protection for these claims that arise after operations cease, “tail” coverage would need to be purchased.

Could this happen to your business?

  • A personal property appraiser valued residential contents. He misidentified an important item and was sued for $800,000.
  • A fine arts appraiser working for a respected auction company on appraisal days gave an oral appraisal of an oil painting, asserting a value of $4,000 to $5,000. The owner relied on the appraiser and privately sold the painting for $5,000. Later the painting sold at the same auction house for $100,000. A lawsuit followed.
  • A contractor failed to detect the faulty workmanship of a masonry contractor (subcontractor) who placed hollow concrete block without proper re-bar reinforcement as specified in the plans. Once discovered, the structure had to be torn down and rebuilt at a cost of approximately $1 million plus resulting delays in project completion.
  • A contractor subcontracts the design of a ventilation system to a mechanical engineer. The engineer, who did not carry errors and omissions insurance, miscalculated the cooling needs of the building and specified an inadequate ventilation system. The building owner demanded $180,000 to replace the poorly performing system.
  • A computer consultant was assisting a client with their credit card processing from one vendor to another. It was alleged that the consultant failed to follow its own guidelines and procedures during the process and mishandled sensitive account information. The client was awarded $1,725,000
  • An auto parts distributor hired a management consultant to help with staffing, budgets, and executive decision-making. Eighteen months after implementing a reorganization strategy, the client alleged that the strategy had a negative impact on their bottom line. The client sued the management consultant, seeking compensatory damages and lost profits.
  • A property manager was hired by a commercial building owner to manage the facility. An ongoing leak in the roof caused substantial damage to tenant property. In addition to suing the building owner to recover the value of the damaged property, several tenants legally terminated their lease agreements. The building owner sued the property manager, alleging negligence for failing to maintain the roof and to repair the leaks in a timely manner. Damages sought included lost lease income. The case settled for more than $200,000. The property manager incurred defense costs, which surpassed $50,000.
  • A retail store owner contracted with a local printer to print flyers announcing a sale event. The delivery time dictated within the contract was 10 days prior to the event date. The printer completed the job three days late, causing the retail store owner to miss the deadline for submitting the flyers for insertion and delivery in a weekly journal. The retail store owner sued the printer for negligent misrepresentation and breach of contract, seeking compensatory damages for lost revenue. The case settled for nearly $50,000. The printer incurred defense costs of almost $15,000.
  • A trust reduces its annual contribution to a charitable beneficiary. The charity commences an investigation and determines that the trust is making contributions to other charities. The charity files suit against the trustee, claiming that its distributions have been wrongly diverted to other organizations. It also brings an action against the law firm that wrote the trust document, claiming its drafting negligence deprived the charity of millions of dollars.
  • A staffing firm assigned two temporary bookkeepers to a company for one year to cover two maternity leaves. During this period, the bookkeepers failed to pay the mortgages on the company’s properties, as well as the property taxes, resulting in a loss to the company of more than $1 million. The company sued the staffing firm for the amount of the loss, alleging negligence. An investigation revealed that both employees had work histories of poor performance and that one had once been fired for incompetence. The company succeeded in showing that had the temporary staffing firm conducted thorough background checks on its temporary employees, it would have discovered the poor work histories. The case settled for more than $325,000. The staffing firm incurred defense costs of more than $100,000.

How we can help you…

Your clients are your business’s most valuable asset and you work hard to deliver the highest level product and/or service, but mistakes can be made causing financial loss to your client. Contact us to discuss the various components of your operation to determine if they are deemed professional services and thus require professional liability policy protection. If an exposure is found, we can assist in determining how best to transfer the risk to an insurance carrier. riskmanagement@tooleinsurance.com