Professional Liability Is Not General Liability

Sunday, March 31, 2013

What is Professional Liability Insurance? Why it is not covered in a General Liability insurance policy? Why do Property Managers, Lawyers, Real Estate Agents, Architects and Travel Agents need Professional Liability insurance? Most service professionals are not aware of the financial hardship they create when the wrong terminology is interjected into a contract or an error in scheduling travel arrangements creates a costly delay. These are brief examples of occurrences that are typically covered under Professional Liability.

Professional Liability is insurance against contractual financial hardship, also known as Errors & omissions insurance (E&O). These policies offer coverage for professional service providers who inadvertently omit something or state something in a contract that causes financial hardship for one of the named contractual parties. As long as the party who created the hardship did not commit the infraction intentionally, a typical Professional Liability/Errors & Omissions insurance policy wills payout up to the policy limits. Usual policy limits are $1MM per claim with an annual aggregate payout of $2MM meaning that an insured can have 2 $1MM claims within one year and have sufficient coverage.

General Liability is coverage for a business or commercial operation protecting it against bodily injury and property damage inflicted to others by an employee or representative of the business. The best correlation is liking General Liability to Auto Liability. Auto liability insurance, required by states, pays for medical expenses and property of others, you caused and damaged, while legally operating your vehicle. This is the same principle of commercial general liability. General Liability, like auto liability, does not cover ANY type of financial hardship inflicted to others.

An important detail to look for in your Professional Liability policy, whether you are currently covered or you are shopping for your first policy, is how defense costs are paid in the event of a claim. Insurance companies offer two options: included within policy limit or paid outside of policy limits. Usually, policies with defense costs outside of the policy limits are issued from more preferred carriers for more preferred risks. When defense costs are included inside the policy limits, the policy is typically geared towards higher risks from less than preferred carriers.

Example: an architect designs an office building; begins working with a general contractor; the general contractor has time limit triggers in his contract with the project owner; due to an unforeseen design flaw/material conflict the general contractor cannot meet his contractual timeline; this costs the general contractor lost revenue of $650,000; the general contractor files a claim against the architect for lost revenue (financial hardship); the architect's Professional Liability Insurance company begins his defense; the policy limits are $1MM per claim with a $2MM aggregate; the policy states defense costs are within the limits allowing $350,000 for defense costs ($1MM less $650,000 damages = $350,000 remaining amount for legal defense); option 2, if defense costs are outside of limits, the architect would have a full $1MM to cover claims regardless of defense costs.

Professional Liability is what every service professional hopes never is never claimed against. It means the professional did not perform his/her due diligence in crafting an effective contract. However, service providers, without PL coverage, are leaving themselves open for possible large claims which could end the business they worked so hard to establish.

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