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Professional liability policies protect professionals against claims involving performance of their services. “Professionals” are held to a higher standard of care than people engaged in other occupations are. However, people engaged in other occupations may also be held liable for the mistakes they make.
The insurance industry has long differentiated between the types of insurance written for the traditional professions and other types of occupations. “Professional liability insurance” has customarily been the label attached to the insurance written to cover accountants, doctors, and lawyers. On the other hand, insurance written to cover losses arising from mistakes made by people in nonprofessional occupations—such as real estate agents, insurance agents, directors and officers, and public officials—has typically been referred to as “errors and omissions” (E&O) insurance.
The insurance policies written to cover professional liability and E&O liability are so similar in overall concept that they are often considered essentially the same type of coverage. For the purposes of this course, professional liability insurance includes E&O coverages.
Nearly all professional liability policies are written on a claims made basis. Thus, a number of the coverage gaps addressed in this section pertain to features that are common to claims made policies that is, retroactive dates and ERPs. Coverage gaps may occur when professional liability coverages are combined with coverages, like general liability insurance, that are usually written on an occurrence basis.
Like the standard CGL policy, professional liability insurance policies afford coverage for the costs involved in investigating, defending, and settling claims. These covered items also encompass attorneys’ fees, court costs, bonds, and related expenses involved in the loss settlement process. Unlike the CGL policy, however, professional policies usually cover these costs within the limits of insurance. That is, the costs associated with investigating and defending claims reduce the limits of insurance that remain available for indemnity.
It should be recognized that the insurers’ internal costs of defending claims, such as the salaries of attorneys and adjusters employed by the insurer or outside adjusters hired by the insurer, do not constitute defense costs according to policy definitions of “defense costs.” As a consequence, these items are not charged to an insured—as are the cost of services rendered by an independent attorney and therefore do not reduce the limit of coverage available. This is true even under professional liability policies where defense costs are within, rather than in addition to, policy limits. (IRMI)
The E&O insurance application for coverage typically describes in detail the scope of the insured’s professional activities. To ensure that all types of work engaged in by the insured will be covered by the policy, portions of the application that require a description of services provided should be reviewed carefully. On most applications, insureds are asked to list the categories of services they provide. After each such category, either the total annual revenue generated from those services or the percentage of the insured’s annual revenue derived from such services must also be indicated.
The standard CGL policy contains three exclusions that apply specifically to professional liability.
These are located under:
1. contractual liability, which excludes, via the definition of “insured contract,” any contract or
a. under which the insured, if an architect, engineer, or surveyor assumes liability for an injury or damage arising out of the insured’s rendering or failure to render professional services; or
b. that indemnifies any architect, engineer, or surveyor for injury or damage arising out of the providing or failure to provide professional services;
2. who is an insured section, which states that no employee is an insured for his or her providing or failure to provide professional healthcare services; and
3. personal and advertising injury coverage, which excludes personal and advertising injury committed by an insured whose business is advertising, broadcasting, publishing, or telecasting. Given these CGL exclusions, an architect/engineer must obtain separate professional liability.
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