The Ins and Outs of Professional Liability Insurance

If you're a lawyer, a doctor, an insurance broker or agent, an architect, or a construction engineer, you're among some of the professions that might require professional liability insurance.

Professional liability insurance goes by many names – professional indemnity insurance, errors and omissions insurance, malpractice insurance – but in every case it does the same thing: protect against losses due to mistakes or negligence on the part of a professional while providing their services.

If you're a professional considering buying this kind of insurance, or are required to get it by law, this article was written for you. We'll go over what this kind of insurance covers, what it doesn't, and run through some specific features you should be looking for in a professional liability policy.

Claims Made Coverage

Most malpractice policies are set up on a claims made basis rather than an occurrence basis.

Auto policies, for example, operate on an occurrence basis, meaning that your coverage will track insured events based on the dates on which they took place. So, if you have an auto policy in force between January 1st to December 31st, 2018, you will be covered for any insured event (like a traffic accident) that takes place within that period. If another party involved in the incident only gets around to filing a claim in January, 2019, it will be dealt with by this policy even if you switched to another insurer or dropped your coverage entirely starting in 2019.

Most professional liability policies work a bit differently. A policy that operates on a claims made basis will cover the insured for claims that are filed while the policy is in force, regardless of when the insured event took place.

So, if you're a medical professional whose malpractice policy is in force for the entirety of 2018, and a patient files a malpractice claim on January, 2018 for an event that took place in November, 2017, you will be covered even if you did not have an insurance policy in force in 2017 when the event occurred.

This is, however, a double-edged sword: if you drop your coverage for 2019 and someone files a malpractice claim in 2019 for treatment they received from 2018, your insurance will not protect you.

Tail Coverage

What happens if you retire, change professions or employers, or stop working for any reason? Do you still need insurance?

Since claims can be made after a negligent act or professional mistake – in some cases, years later – you likely need extended reporting coverage, which is known as tail coverage. In fact, you need tail coverage in force for as long as the statutes of limitation allow your patients or clients to file a suit against you. Otherwise, a patient whose medical complications only show up years after treatment or a homeowner whose renovation defects are revealed only when they break or wear far earlier than anticipated might end up costing you quite a bit of money even after you've hung up your gear for good.

How long you'll need to have tail coverage will depend on your profession. For personal injuries, the typical statute of limitation is two years, although in the case of minors it is normally extended until they reach the age of maturity. So, if your professional mistake causes harm to a one-year-old, you could find yourself facing a liability suit 19 years later (two years after the child turns 18).

For architects and construction engineers, the statute for latent defects is commonly 10 years (though it varies from state to state).

If you're a doctor employed by a hospital and covered under its insurance, you might need to get tail coverage if you switch employers or become self-employed. The same applies to lawyers, architects, and engineers who are employed and insured through a firm.

Nose Coverage

Nose coverage is an alternative to tail coverage that might be available to you when you switch employers or strike it out on your own.

Instead of buying tail coverage from the hospital or firm's insurer after you leave their employment, you might instead be able to buy nose coverage from your new insurer. Like tail coverage, it protects you against claims for prior negligent acts, but it comes at the front of your new insurance policy rather than at the end of your previous one (hence the name).

Not every insurer offers nose coverage, but it's worth looking into. It's almost always cheaper than tail coverage.

Gaps in Coverage

Gaps in coverage can come with a steep price in malpractice insurance, so they must be avoided.

Let's say you're covered throughout 2018 by your professional liability policy and then you take an extended break from work between January 1st and March 31st of 2019. If you decide not to immediately renew your policy and only buy one that goes into effect on April 1st, 2019, you're left with a three-month gap in your coverage.

That might not seem like a big deal, but following a gap like this many insurers will refuse to cover acts that occurred prior to the new start date of the policy (in this case, April 1st, 2019).

What Is Covered

So now that you get how the coverage works, let's take a moment to go over what kinds of things it covers.

Policies written by different insurers can vary significantly. For example, some policies cover only "negligent" acts, while others will also cover "wrongful" acts. Note, however, that wrongful acts almost never include criminal acts, which are excluded from just about every kind of insurance policy.

To give you a sense of the difference, let's make up an example. You're an insurance agent about to leave your firm. Under the terms of your former employment, you are barred from selling insurance to the firm's clients. But you end up doing just that and they file an action against you. Are you covered by your professional liability insurance? If it covers only negligent acts, no, you're unlikely to be covered for selling policies to the firm's clients. If it covers wrongful acts, however, it will likely cover you.

The breadth of coverage also varies significantly. Defamation (libel and slander) is sometimes covered, sometimes not. The same with breach of contract and breach of warranty. Cyber liability, which can cover data breaches and other computer technology issues is not always covered, though it can often be purchased separately (learn more in Cyber Liability: Is Your Business Covered?).

What to Look For

So the bottom line is not a short one. Malpractice insurance policies are often more complicated than auto or homeowner’s policies.

You need to ensure that you have no gaps in coverage and that you have adequate tail or nose coverage. Take special care when changing employers. As to the acts that are covered, they are limited to those specifically enumerated in the policy.

With these variations and just how much is at stake (damages for malpractice or negligence could be extremely costly), it makes sense to work with an experienced insurance professional. Finding an agent or broker who knows professional liability insurance well is highly recommended (see What Is an Insurance Broker? to find out what these experts do and how they can help you).