15.3 Professional Liability and Errors & Omissions

Professional Liability and Errors & Omissions

Professional liability insurance covers claims arising from a professional's rendering or failure to render professional services - acts of negligence, error, or omission in performing the work the professional was hired to do. Because the General Liability policy excludes professional services, a separate professional liability or errors and omissions (E&O) policy is required.

Terminology splits by profession: medical professionals carry malpractice; lawyers, accountants, insurance agents, architects, and consultants carry errors and omissions (E&O). The trigger is an economic or bodily injury harm caused by the quality of professional advice or service, not by a physical premises hazard.

Claims-Made vs. Occurrence Triggers

Most professional liability is written on a claims-made basis, unlike the occurrence trigger common in CGL. The distinction is heavily tested:

• Occurrence policy: covers injury that occurs during the policy period, no matter when the claim is reported.
• Claims-made policy: covers claims first made during the policy period (or extended reporting period) for acts that occurred on or after the retroactive date.

The retroactive date is the cutoff before which incidents are not covered. A claims-made policy with no prior acts coverage uses the policy inception as the retroactive date; prior-acts coverage moves it earlier.

Extended Reporting Periods (Tail Coverage)

When a claims-made policy is cancelled or not renewed, claims reported afterward would otherwise be uncovered. An Extended Reporting Period (ERP), or tail, allows reporting of claims after expiration for incidents that occurred during the policy period (after the retroactive date).

• Basic (mini) tail: automatic, short (often 30-60 days) to report known incidents.
• Supplemental tail: purchased, can extend for years or be unlimited.

A tail does not extend the retroactive date; it only extends the time to report. Incidents before the retroactive date remain uncovered.

Limits, Defense, and a Worked Numeric

Professional liability limits are often per claim and aggregate, and defense costs frequently erode the limit ("defense within limits" or wasting limits). This differs from the CGL, where defense is usually paid in addition to the limit.

Assume a $1,000,000 per-claim limit with defense within limits. A claim settles for $700,000 and the insurer spent $250,000 on defense.

• Total charged to the limit: $700,000 + $250,000 = $950,000
• Remaining on that claim limit: $1,000,000 − $950,000 = $50,000

If defense had been outside the limit, the full $1,000,000 would remain available for indemnity and only the $700,000 settlement would erode it. The trap: candidates forget defense costs consume the limit.

Consent-to-Settle and Common Exclusions

Many E&O policies contain a consent-to-settle (hammer) clause: if the insured refuses to consent to a settlement the insurer recommends, the insurer's liability is capped at the settlement amount plus defense to that date, and the insured bears the excess. Common exclusions include:

• Dishonest, fraudulent, or criminal acts.
• Bodily injury and property damage (covered by CGL, not E&O - except for some malpractice).
• Claims arising before the retroactive date.
• Punitive damages (where not insurable by state law).

Professional Liability vs. General Liability

Professional liability (errors & omissions, E&O) covers harm caused by a failure to use the degree of skill expected of a professional — bad advice, a missed diagnosis, a drafting error. It responds to economic loss from professional mistakes, which the CGL excludes (the CGL covers bodily injury and property damage, not financial harm from rendering professional services). Most professional liability is written on a claims-made basis with a retroactive date and tail options.

Types of E&O and Malpractice

The line spans many professions, and the exam expects you to match coverage to the professional:

Worked point: an insurance agent who forgets to add a customer's new building to a policy, leaving it uninsured at a fire, faces an E&O claim — exactly the professional-error exposure agents must insure. Most policies cover defense within or outside the limit (read carefully) and exclude intentional/dishonest acts and bodily injury.

Claims-Made Mechanics in E&O

Because professional mistakes surface long after the work, E&O is almost always claims-made: it responds to claims first made during the policy period for acts on or after the retroactive date. A professional switching insurers should either keep the same retroactive date or buy a tail (extended reporting period) so a late-reported claim about past work is not stranded. A new insurer can grant prior-acts (nose) coverage by setting an earlier retroactive date. Letting an E&O policy lapse with no tail leaves the professional exposed for every past engagement — the single most important practical warning in this line.

Defense, Exclusions, and the Agent E&O Example

E&O policies frequently pay defense within the limit (eroding it) rather than outside, so adequate limits matter. They exclude intentional, fraudulent, or dishonest acts, bodily injury/property damage (CGL territory), and known prior claims. The classic exam scenario is an insurance agent E&O claim: an agent fails to procure requested coverage or misadvises a client, who suffers an uninsured loss and sues. The agent's own E&O policy — not the agency's CGL — responds, illustrating that professional financial errors require dedicated professional liability coverage.