15.3 Professional Liability and Errors & Omissions

What professional liability covers

General liability covers bodily injury and property damage; it expressly excludes the rendering of, or failure to render, professional services. Professional liability (also called errors and omissions, E&O, or for medical risks malpractice) fills that gap. It responds to economic harm caused by a professional's negligent act, error, or omission in delivering services — bad advice, a missed deadline, a faulty design, a misdiagnosis — even when no bodily injury or property damage occurs. The exam wants you to recognize that professional liability turns on financial injury from a service, not on physical damage.

Claims-made is the norm

Most professional liability is written on a claims-made basis rather than occurrence. Three concepts control coverage:

• Retroactive date — the earliest date a wrongful act can occur and still be covered. Acts before this date are excluded, even if the claim arrives during the policy period.
• Claims-made trigger — coverage responds to the claim first made during the policy period (for an act on or after the retro date).
• Extended Reporting Period (ERP, or tail) — when a claims-made policy is cancelled or not renewed, the ERP lets the insured report later claims for acts that occurred before termination. A basic tail is automatic and short; a supplemental tail is purchased and can be much longer.

Killing the retroactive date or letting a tail lapse creates uncovered gaps — a classic exam scenario when a professional switches carriers.

Common professional lines and their triggers

Medical malpractice is unusual in that the injury is physical; most other professional lines respond to purely economic loss, which is exactly what the CGL excludes.

Defense and limit structure

Professional policies frequently use defense-within-limits (also called eroding, wasting, or burning limits): defense costs are subtracted from the limit of liability rather than paid in addition to it.

Worked example: An accountant has a $1,000,000 E&O limit on a defense-within-limits policy. Defense costs reach $250,000 and the claim settles for $900,000. The total demanded is $1,150,000, but the policy caps total payments at $1,000,000:

• Defense $250,000 + indemnity available $750,000 = $1,000,000 limit exhausted.
• The insured personally owes the remaining $150,000 of the settlement.

Under a CGL, by contrast, defense is normally paid in addition to the limit, so the exam contrasts the two structures directly.

Occurrence-form professional coverage and step-up pricing

A minority of professional lines (some miscellaneous E&O and certain allied-health forms) are still written on an occurrence basis, where the policy in force when the act occurred responds no matter when the claim is reported. This eliminates the need for a tail but is more expensive and harder to find.

For claims-made buyers, premiums step up over the first several mature years: a first-year claims-made policy is cheap because little prior exposure is covered, then rises annually until it reaches the mature claims-made rate (typically year five), after which it costs roughly the same as an occurrence policy. Understanding this curve explains why dropping a long-held claims-made policy and buying a tail is sometimes cheaper than the tail itself appears.

Exam traps

• Intentional or dishonest acts are excluded; professional liability covers negligence, not fraud.
• Bodily injury and property damage belong to the CGL, not E&O (except medical malpractice).
• A prior-acts or nose coverage on a new policy can replace a lost retroactive date when changing carriers.
• Insurance-agent E&O does not cover the agent's own commissions disputes or punitive damages where uninsurable by law.
• 'Consent-to-settle' (hammer) clauses can shift costs to the insured who refuses a recommended settlement.
• A basic ERP is often automatic for a short window (e.g., 60 days to report, 5 years to discover); a supplemental ERP must be elected and paid for, usually within 30-60 days of nonrenewal.

Consent-to-Settle and the Difference From CGL

A defining professional-liability feature is the consent-to-settle ("hammer") clause. Many E&O and malpractice forms require the insured's consent before the insurer settles, protecting the professional's reputation; a hammer clause then caps the insurer's payment at the proposed settlement plus defense to that date if the insured refuses a reasonable settlement. The exam tests that professional forms behave differently from the CGL, where the insurer controls settlement outright.

Equally important: professional liability covers economic loss from rendering or failing to render professional services — bad advice, a missed deadline, a flawed design — even when no bodily injury or property damage occurs. The CGL excludes professional services precisely so this exposure goes to a dedicated E&O form. Spotting that a pure financial-harm claim with no BI/PD belongs to E&O, not the CGL, resolves the most common professional-liability item.