Professional Liability – Frequently Asked Questions
Professional liability insurance, or errors & omissions insurance, protects professionals (and sometimes his or her employees) or companies against third-party claims for inadequate work or negligent actions that cause intangible and economic losses. The actions may seek to hold the professional or company responsible for advice/services provided, failure to provide advice/services or advice/services which did not have the promised results. Liability insurance refers to a broad spectrum of coverage that may go by different names. Indeed, a professional liability policy may be written for almost any occupation or profession. For example, doctors, dentists and hospitals carry errors & omissions insurance commonly referred to as malpractice insurance, while insurance litigation attorneys and accountants carry professional liability insurance.
Because professional liability policies cover a broad spectrum of individuals and companies, policy coverage and exclusions can vary greatly. Generally, professional liability policies cover judgments, settlements and the costs of defense for alleged or actual negligence. Most professional liability policies do not cover fraudulent or criminal acts, third-party injuries or property damage. When met with allegations of professional error, professionals and companies face high costs in litigation. Indeed, even frivolous suits by clients or third parties may cause undue expenses and burdens for professionals and companies alike. This burden increases when a professional liability insurer improperly declines coverage or provides negligent coverage.
Professional liability disputes are governed by state law. California law imposes an implied duty of good faith and fair dealing (also known as insurance bad faith) on every insurance policy issued in the state, based on fundamental principles of fairness.
Filing a claim is the first step to recovery under a liability policy. Although policies may define “claim” slightly differently, in general, a claim means a demand by the insured for money or services. A claim may be a request to cover the costs of or undertake the defense of a third-party claim or pay a settlement. Although a policyholder need not use any “magic language” to denote a claim, courts have distinguished a claim as something greater than an inquiry or grievance, and less than the institution of a formal lawsuit. Policyholders should err on the side of caution when submitting a claim to their liability insurers by communicating the circumstances, and their expectations of coverage.
Generally, “claims-made” liability policies limit coverage to liability from claims made within the policy period. Therefore, it is very important that policyholders provide notice of liability and/or file a claim with insurers as soon as possible and within the policy period, in a manner specified by the terms of the policies so as to ensure coverage. The California notice-prejudice rule prevents insurers from denying coverage based on the policyholder’s delay in notification, absent a showing of prejudice.
However, coverage under a “claims made and reported” policy mandates timely notice to the insurer and late notice cannot be excused under California’s notice-prejudice rule. What constitutes timely notice depends on the terms of the policy.
A policyholder who receives notice of liability should immediately notify the insurer and/or file a claim, pursuant to the terms of the professional liability policy. Following this notification, insurers will review the claim and determine whether the policy provides coverage. Insurers often dispute coverage, issue denials or in some cases, attempt to rescind the policy. To do so, insurers may point to policy language and exclusions or cite a misrepresentation in the application or claim forms.
If the insurer denies coverage, the policyholder may bring suit against the insurer for wrongful refusal to defend and breach of contract. A policyholder may need to pay for its own defense and sue the insurer to recover its fees and expenses incurred in its defense or settlement. In some cases, these actions will overlap.
In addition, if the insurer acts improperly in denying coverage, it may be liable for fraud, intentional misrepresentation and breach of the implied covenant of good faith and fair dealing, or bad faith. Under California law, the policyholder may be entitled to recover damages including consequential damages, punitive damages, interest, costs and attorneys’ fees.
Under most liability policies, the insurer agrees to defend the policyholder against covered claims. In these cases, the insurer’s duty to defend is broader than its duty to indemnify. Indeed, current court cases explain the duty to defend exists if there is any potential for coverage under the liability policy. Whether there is any potential for coverage depends on the terms of the liability contract at issue; the insurer has a duty to defend when the language of the liability contract creates an objectively reasonable expectation on the part of the policyholder of defense under the circumstances. Insurers that are uncertain as to any potential for coverage may agree to a duty to defend, subject to a reservation to rights, which allows insurers to recover its costs of coverage.
Conversely, the duty to indemnify only exists if the policyholder’s conduct is actually covered under the liability policy.
“Claims made” coverage (or “claims made” policy): Many recently-issued policies are written on a claims-made basis, which means coverage is limited to claims made during the term of the policy. In other words, there is no coverage for a claim made after a policy expires, even if the alleged error or omission is alleged to have occurred during the policy.
“Occurrence” coverage (or “occurrence” policy): “Occurrence” policies cover claims of errors or omissions taking place within the policy period, even if the claim made after the policy expires. “Occurrence” policies tend to be more expensive compared to “claims made” policies, because insurers are at risk for paying claims even after the policy expires.
Duty to defend: Some policies provide coverage for the costs of defending the professional or company against suits by third parties.
Indemnity: Certain policies only indemnify the policyholder against actual loss or damage, as opposed to liability. If this is the case, the policyholder must first pay for the loss or damage before seeking reimbursement from the insured.
Covered parties: A professional liability policy will define the insured or covered parties. For example, the policy may or may not include the board of directors, independent contractors and prior employees. If an employee is not a covered party or insured, then your professional liability insurance does not cover any acts or omissions by that employee.
Exclusions: Every professional liability policy contains a list of exclusions. Exclusions vary depending on the nature of the covered business or professional. In general, professional liability policies cover only negligence, and coverage does not extend to “non-negligent” or intentional errors. Professional liability policies may also exclude specific acts from coverage. Make sure you or your company is appropriately covered for the types of risks you may be exposed to.
“Professional services”: A professional liability policy may limit coverage to enumerated professional services, or extend coverage to whatever service is normally performed by the professional/company. Policies that limit coverage to enumerated services typically offer more limited protections.
“Tail coverage” or “extended reporting period”: Some policies may contain “tail coverage” or an “extended reporting period” which extends the time within which a claim may be made for a policy year. Policies with tail coverage/an extended reporting period offer coverage if the error or omission took place during the policy year and the claim is made before the expiration of the tail coverage/extended reporting period.
State laws set forth the statute of limitations for third parties filing professional liability claims. Once the statute of limitations expires, third parties are usually barred from filing the claim.