15.3 Professional Liability and Errors & Omissions

Professional Liability and Errors & Omissions

Professional liability insures against claims arising from the rendering or failure to render professional services - a negligence standard tied to the duty a professional owes a client. The general commercial liability (CGL) policy specifically excludes professional services, which is why a separate policy is required.

Two terms matter for the exam:

• Errors & Omissions (E&O) is the umbrella term for professional liability covering financial-harm professions: insurance agents, real estate brokers, accountants, attorneys, architects, engineers, and technology consultants.
• Medical malpractice is professional liability for healthcare providers, covering bodily injury arising from treatment.

Unlike CGL (which requires bodily injury or property damage), most E&O claims involve purely economic loss with no physical injury.

Claims-Made vs. Occurrence

Professional liability is almost always written on a claims-made basis, not occurrence. The trigger is when the claim is first made against the insured during the policy period (and reported), not when the act occurred.

Key claims-made features:

• Retroactive date: the earliest date a covered wrongful act may have occurred. Acts before the retro date are not covered.
• Extended Reporting Period (ERP / "tail"): lets the insured report claims after the policy ends for acts that happened during the policy term. A basic tail is automatic (often 60 days); a supplemental (full) tail is purchased.
• Prior acts coverage: continuous claims-made renewals advance protection by keeping the retro date fixed.

Claims-Made Coverage Trigger Table

A frequent trap: the act being inside the policy period is not enough for an occurrence-style payout - on a claims-made form, the claim must also be made (and reported) during the policy period or an active extended reporting period.

Worked Limit and Defense Example

An insurance agent's E&O policy has a $1,000,000 per-claim limit / $2,000,000 aggregate with a $10,000 deductible that applies to loss and defense costs (a "defense-inside-the-limits" form, meaning defense erodes the limit).

A client sues for a missed coverage placement: indemnity settlement $700,000, defense costs $250,000.

Because defense is inside the limit, total demand against the limit = $700,000 + $250,000 = $950,000, which is within the $1,000,000 per-claim limit. The insured pays the $10,000 deductible; the insurer pays $940,000. Had defense been outside the limit, the insurer would pay full defense plus up to the limit for indemnity - a much broader and more expensive form.

Professional Liability vs. General Liability

Professional liability (errors and omissions, E&O) covers economic loss a client suffers because of the professional's negligent act, error, or omission in rendering or failing to render professional services - bad advice, a missed deadline, a faulty design. It fills the gap left by the CGL, which covers bodily injury and property damage but excludes the rendering of professional services. E&O responds to financial harm from professional mistakes, not physical injury. The exam often asks which policy responds when a client loses money because of an advisor's error - the answer is E&O, not the CGL.

Claims-Made, Retroactive Dates, and Defense

Professional liability is almost always written claims-made because professional errors surface long after the work is done. The same rules apply as in CGL claims-made: the claim must be first made during the policy period and the wrongful act must have occurred on or after the retroactive date, with extended reporting period (tail) coverage available when a professional retires or switches insurers. Many E&O policies are "defense within limits" (eroding limits), meaning defense costs reduce the available limit - a critical contrast with the CGL, where defense is paid in addition to the limit.

A doctor's professional liability is specifically called medical malpractice.

Consent-to-Settle and Common Professional Lines

Many E&O policies contain a consent-to-settle ("hammer") clause: the insurer cannot settle a claim without the professional's consent, but if the insured refuses a settlement the insurer recommends, the insured may become responsible for amounts above what the settlement would have cost - protecting the professional's reputation while discouraging unreasonable refusals. Common professional lines the exam names include medical malpractice, lawyers professional liability, accountants E&O, architects and engineers E&O, insurance agents E&O, and technology/miscellaneous E&O.

Recognizing the claims-made trigger, eroding-limit defense, and consent-to-settle clause secures these points.

First-Dollar Defense, Eroding Limits, and Common Exclusions

E&O policies vary in how defense costs interact with the limit, and the exam tests the difference. Under a defense-within-limits (eroding or wasting) limit, every dollar spent on defense reduces the money left to pay a judgment - so a $1,000,000 policy that spends $300,000 defending leaves only $700,000 for settlement. Under a defense-outside-limits approach (more like the CGL), defense does not erode the limit. E&O also commonly excludes intentional, dishonest, or fraudulent acts, bodily injury and property damage (CGL territory), and claims known before the policy began.

Combining the claims-made trigger, retroactive date, eroding-limit defense, and these exclusions resolves nearly any professional-liability scenario.