Professional Liability Insurance, which is similar to Errors & Omissions Liability Insurance or Professional Indemnity Insurance, protects a business or individual professional from legal claims made by dissatisfied clients. It protects against claims that a service, such as professional advice, has led to financial or reputational damage. This type of insurance is applicable to almost any service or industry practitioner or business, but when termed in this way, rather than Errors & Omissions Insurance, or Professional Indemnity Insurance, generally refers to products specifically tailored to financial services professionals such as insurance agents and investment or financial advisors.
- A Life and Health Insurance agent sells a client a policy and the policy does not fully cover the medical treatment of a subsequent health issue the client unfortunately suffers. The client, who took the policy out in the belief that it would mean they would not subsequently be faced with additional medical bills, takes legal action against the agent with a claim of having been mis-sold an insurance policy unsuited to their stated needs.
- A Registered Investment Advisor (RIA) recommends an investment fund in good faith to a client. The fund has done well recently, the management has a good track record and the advisor believes all the evidence points to the fund continuing to do well. It subsequently transpires that senior management has been implicated in trading irregularities, are banned by regulators, and the fund tanks with investors losing their money. The client sues the RIA, having invested into the fund on their advice.
Professional Liability Insurance in Action
In the first theoretical case study, the fact that the insurance policy sold by the agent did not subsequently cover a health care need of the client may or may not have been an error of judgement or mistake on the part of the agent. In the second example, it would have been practically impossible for the RIA to have predicted the circumstances around the negative outcome for the client.
Professional Liability Insurance protects businesses and private practitioners in the service industry both for legal defense costs in cases where clients make claims which prove to be groundless and when mistakes have been made. The service industry relies on human judgement and execution and even the best professionals will occasionally make errors which could lead to perceived financial or reputational loss and client litigation.
Such claims, groundless or otherwise, can quite easily bankrupt or severely financially impact small and medium sized businesses, both as the result of costs associated with their defense and eventual damages if the outcome of the legal arbitration is not favorable.
Who Should Have Coverage?
All professional service and advisory professionals would be best advised to cover themselves by taking out the relevant Professional Liability Insurance coverage. In our experience, General Insurance Agents, Property & Casualty Insurance Agents, Life & Health Insurance Agents and Registered Investment Advisors (RIAs) are professions which are at particular risk of client litigation.
While not a legal requirement, many regulatory bodies that certify professionals and allow them to operate on a national and state level demand their members are covered. Many contracts also have as a requirement that service providers tendering for them are covered by a certain level of protection. Even if this is not a requirement, potential clients will often have greater peace of mind when working with professionals with Professional Liability Insurance coverage, so they feel confident they will have recourse to financial compensation in the worst case scenario.
Choosing the Correct Professional Liability Insurance Policy.
Professional Liability Insurance is not a ‘one-size-fits-all’ product. The policy you require will depend very much on your profession, the number and experience of individuals to be covered, and the nature and scope of projects those covered will be involved in. However, the general maxim of insurance, that the highest level of coverage you can afford is the best level of coverage holds true. Insurance agents should especially practice what they preach to their own clients!
As with any kind of insurance, different providers will be strongest in their offerings in different areas. Compare offers and levels of service between a number of providers to find the right policy for you.
Make sure you fully understand the policy and the period it covers. Some policies will not cover litigation resulting from events which happened during the period of the policy if it has since expired. There are various options such as extended reporting period endorsement clauses, which can be added. This means the policy will cover claims made after the expiry of the policy if they date from work which took place during the period of the policy. This is particularly relevant if you take out more comprehensive coverage for a particular project.
All information provided in this blog is for informational purposes only. The sources used are presumed accurate. CITA Insurance Services, Brown & Brown Program Insurance Services, Inc. and Brown & Brown, Inc. will not be liable for any errors, omissions, losses, injuries or damages arising from its display or use and will not assume responsibility for any misguided information. No guarantees are implied.