By Adam Puharic, Puharic and Associates, Inc.
Congratulations, you’ve started your new business and now we’re off to the races finding your American Dream. Whether you are an engineer, environmental consultant, accountant, attorney, realtor or financial advisor, you’ve probably been told that your first business insurance purchase needs to be Professional Liability. This important coverage, also known as Errors and Omissions or Malpractice Insurance, is in many cases required by law and licensing.
You seek out a trusted independent insurance agent, and you purchase your first policy. But stop, and ask, “Do I really understand what this policy covers?” If it is unclear, or if you’re embarrassed to acknowledge it, you are not alone in not fully understanding one of the most important coverage lines for white collar professionals of all type.
The International Risk Management Institute (IRMI) defines Professional Liability Insurance as follows: Professional Liability — a type of liability coverage designed to protect traditional professionals (e.g., accountants, attorneys) and quasi-professionals (e.g., real estate brokers, consultants) against liability incurred as a result of errors and omissions in performing their professional services.
“But I already have a General Liability policy,” you may ask, “How is this different?” General Liability will cover claims of bodily injury or property damage that result from the operation of your business. “Although there are a few exceptions (e.g., physicians, architects, and engineers), most professional liability policies only cover economic or financial losses suffered by third parties,” according to IRMI.
Economic or financial losses may include failure to render professional services, inadequate advice or recommendations, or financial losses resulting from poor design, lack of oversight, or just plain mistakes. Among some examples:
An Architect designs a new shore home and draws the first floor six inches below the base flood elevation, causing the homeowner tens of thousands of dollars in unnecessary excess flood insurance premiums over the course of several years.
An Engineer designs a drainage retention basin for a home development far too close to the basement of one of the homes. Over a period of several years, the basement is undermined, and cracks appear in the foundation.
In each of these examples, the aggrieved party suffers financial hardship and loss due to the error, act or failure to act, or poor design or advice of the professional. This type of loss is explicitly NOT covered on a General Liability policy.
What’s more, the evolution of technology has created a multitude of job-types that did not exist a decade ago, and the need for Professional Liability continues to increase.
How would my Professional Liability policy respond in the event of a claim? A simple metaphor I use in explaining to my insurance clients how Professional Liability works is that I refer to it as a “rent-a-law-firm” insurance policy. In its most basic form, the allegation of error or omission during the covered policy period would trigger the appointing of a lawyer, who would gather facts and documents, interview and discuss opportunities for settlement with the plaintiff, argue in front of a judge, and hopefully resolve the matter in a favorable way.
Because financial loss is a slightly more abstract concept, Professional Liability claims oftentimes contain a level of negotiation and settlement with the plaintiff that is less common for claims such as automobile accidents or house fires. That’s what makes this coverage so unique! By purchasing Professional Liability, your carrier can retain attorneys on your behalf, and in many cases, you can have some level of say in the firms or lawyers they choose for you.
This the key to understanding this powerful coverage: in today’s information economy, so many different professions are offering advice, coaching, help, recommendations, monitoring, and protection. Each of these represent a professional “promise to provide a service.” And each of these acts can result in financial loss, an unhappy customer, and an opportunity for lawsuit. The Professional Liability insurance policy is a business owner’s shield and a far better solution than asking a relative in the family who may practice law to represent your company as a favor.
The cost of this insurance is usually a factor of your firm’s review, but small businesspeople can gain access to $1,000,000 of liability protection for both defense and settlement for as little as $1,000. Clearly, Professional Liability is a powerful tool that gives even the smallest and newest of entrepreneurs the legal protections of a fortune 500 company.
There is so much more to learn about this important coverage as your business evolves, but to summarize this article: Professional Liability allows even the smallest of businesses to “rent-a-law firm” for a fraction of the cost it would take to put an attorney on retainer.
