More and more, the US has become a service economy and less of a manufacturing economy. That means that we are providing more services rather than products. Some of those services are in the form of advice, and as such, wrong advice can cause harm to those we advise.
So, who might be providers of advice? Certainly, those in the insurance business. Add to those the ones in the legal profession. Include other advisory professions such as accountants, architects, consultants, lenders, realtors, auto insurance agents, certain programmers, cyber technologists, and more. The list is very long. Don’t forget the medical and dental professions, although their wrongly provided service is called “malpractice,” as opposed to just advice.
Categories of harm caused by incorrect service
There are two rough categories of harm that can be caused by incorrect service; financial and physical. For example, a financial advisor may cause financial harm by his error or his omission. Financial compensation might be sought from such a case. On the other hand, if an architect does a poor job in design, his design may result in the collapse of a building, and harm to individuals and property (other than the property he designed.) A doctor might cause disease or loss of a limb due to an omission. Both of these examples could also result in financial loss.
Does general liability coverage cover such exposure?
General liability, after all, does protect the insured in case he is sued for bodily injury or property damage to a third party. General liability is not designed to cover poor advice or service, and so exclusions are specifically named such that the coverage does not go so far as providing protection against those and other exposures specifically covered by professional Liability. Let’s look at how car insurance might offer a remedy:
Professional Liability coverage
What we now call “Professional Liability” coverage was once called E and O, which stands for Errors and Omissions. Stating the obvious, an insured could make an error in judgment and cause loss, or they might overlook a point that later becomes an issue.
The term “Professional Liability” is broader than just E&O, however. Over the years, such coverage as negligence, misrepresentation, violation of good faith and fair dealing, and inaccurate advice has been added to the basic E&O definition of coverage.
How a loss might occur?
For example, if a Trust attorney does not have experience on the possible outcomes of a particular type of wording, and she neglects to provide a clarification in a trust that she writes, the property might not be properly protected, heirs may suffer losses to their inheritances, or the state may have to arbitrate an outcome; that process being lengthy and expensive to the heirs.
In addition, certain occupations have a component of physical loss exposure in addition to financial loss exposure. Architects for sure have that, as do Doctors. Certain consultants also have that. One of my client’s programs control computers for assembly robots and gantry cranes. If he programs one incorrectly and it drops a load onto someone or something, there would be both physical and financial damage. He has a type of professional liability program called Architects and Engineers coverage, which would cover both types of damage.
That consultant also has general liability coverage just in case he is on a client location and creates a physical hazard resulting in injury or financial loss, but not related to his programming. It is, in fact, General liability coverage.
Some things to note
- As a side note, not even citizens insurance company will allow willful acts to be covered, so general and professional liability policies exclude willful or criminal acts. If it is shown, for example, that the outcome of action was known before the service was provided, that could be a fraud. Fraud is criminal, and criminal acts are never covered by insurance contracts.
- As another side note, sometimes the lines become blurred when speaking of prior knowledge. These often become decided in court as both sides argue whether or not there was prior knowledge. In fact, the exact time of loss, including prior knowledge leads us into the next aspect of Professional Liability coverage, and that is the coverage form.
What should one look for in a professional liability policy?
There is a clause called “duty to defend.” If that clause is not there, then you may be on your own in defense of your position and only be reimbursed after a lengthy trial. Costly, to say the least.
There may be a window within which a claim must be filed; often 60 days from the time of notification of the event as an example. If the notification to the insurance company falls outside of that, the company may not have a “duty to defend.”
Since these policies are almost always written on a “claims made” basis, there must be prior acts coverage, otherwise, anything that happened prior to the effective date of this year’s policy may not be covered—even if that policy is a continuation of the last year’s policy. And don’t let that policy lapse, or the prior acts coverage restarts with this year’s effective date. Not a good scenario.