15.3 Professional Liability and Errors & Omissions

Professional Liability and Errors & Omissions

Professional Liability (also called Errors & Omissions, E&O, or for medical professionals Malpractice) responds to economic and bodily injury harm caused by a failure to use the degree of skill expected of a professional. It exists because the CGL excludes liability arising out of the rendering or failure to render professional services. A negligent tax return, a missed diagnosis, a faulty engineering calculation, or a real-estate agent's nondisclosure are all professional acts the CGL will not touch.

The defining feature: claims-made

Most professional liability is written on a claims-made basis, unlike the occurrence-based CGL. The trigger is when the claim is first made, not when the act occurred. Two dates govern coverage:

• Retroactive date: the earliest date a covered act could have occurred. Acts before the retro date are not covered, even if the claim arrives during the policy period.
• Policy period: the claim must be first made and reported during this window (or any extended reporting period).

For a claim to be covered on a claims-made policy, both must be true: the wrongful act occurred on or after the retroactive date, AND the claim was first made during the policy period (or tail).

Extended Reporting Periods (tail coverage)

When a claims-made policy is cancelled or not renewed, claims reported afterward would be uncovered. Extended Reporting Periods (ERPs) solve this:

The full supplemental tail does not extend the policy limits — it only extends the time to report claims for acts that occurred before expiration. A common trap: the tail does not cover acts committed after the policy expired; it only buys reporting time for pre-expiration acts.

Worked numeric — limits and the deductible

Professional liability deductibles often apply to both loss and defense (loss adjustment expense), which differs from the CGL where defense is usually outside the limit.

• Each-claim limit: $1,000,000; aggregate: $3,000,000
• Deductible: $25,000 each claim, including defense costs
• Defense costs: $80,000; settlement: $400,000
• The deductible $25,000 is absorbed by the insured first; insurer pays $80,000 + $400,000 - $25,000 = $455,000, all of which erodes the $1,000,000 each-claim limit if defense is 'inside the limits.'

Why Professional Liability Is Separate from CGL

The CGL excludes liability arising from professional services because professionals are held to a higher standard of care than the ordinary "reasonable person." Errors & Omissions (E&O) and professional liability fill that gap, covering financial harm from a professional's negligent act, error, or omission in rendering services — even with no bodily injury or property damage. Examples: an insurance agent who fails to bind requested coverage, an architect whose design is defective, an accountant who misstates financials.

Claims-Made, Retroactive Dates, and Specialty Forms

Almost all professional liability is written claims-made, so the retroactive date and tail concepts control. The exam contrasts occurrence-based bodily-injury professions — notably medical malpractice, which may be occurrence or claims-made — with E&O for non-bodily-injury professions (real estate, insurance, legal, tech). Many forms include disciplinary-proceedings defense and prior-acts coverage. A frequent point: professional liability typically excludes intentional/dishonest acts and bodily injury (those belong to CGL), keeping the line focused on economic loss from professional error.

Defense Inside vs. Outside the Limit

A critical professional-liability distinction: many E&O and medical-malpractice forms pay defense costs inside the limit (eroding/"wasting" limits) — every dollar of defense reduces the money left to pay a judgment. Contrast the CGL, where supplementary defense is outside the limit. On a claims-made E&O policy with a $1,000,000 eroding limit, $300,000 in defense leaves only $700,000 for settlement, a math point the exam tests directly.

Consent-to-settle and the duty to defend

Many professional liability forms — especially for physicians, lawyers, and accountants — contain a consent-to-settle clause (sometimes a 'hammer clause'). The insurer cannot settle without the insured's consent because settlement can damage a professional's reputation. If the insured refuses a settlement the insurer recommends, the hammer clause caps the insurer's payment at the amount it could have settled for plus defense to that date — the insured bears any excess.

Common professional E&O lines

• Medical Malpractice: physicians, dentists, hospitals; high severity, claims-made dominant.
• Lawyers / Accountants / Architects & Engineers (A&E): A&E policies often have a separate bodily injury exclusion because the CGL handles premises BI.
• Insurance Agents E&O: covers the producer's own negligent advice and policy placement errors.
• Miscellaneous / Tech E&O: consultants, IT firms; increasingly bundled with cyber.
• Directors & Officers and EPLI are management-liability cousins covered in 15.4.

Exam contrast: professional liability covers financial/economic loss from rendering services; the CGL covers bodily injury and property damage from premises and operations. A loss is rarely covered by both — classify by whether the harm flowed from a professional service or a physical premises/operations hazard.