Professional liability insurance is a form of business liability insurance. It protects the insured if a liability claim or lawsuit is brought against them due to alleged professional wrongdoing in the services they provide to the public.

Professional liability insurance is also known as errors & omissions insurance. It is important to have this coverage given the litigious nature of society. Mistakes happen, and professional liability insurance protects both a business's customers and a professional's personal assets.

Professional liability insurance is available to many professionals, such as attorneys, doctors, accountants, architects, engineers, insurance agents, real estate agents and brokers, and more. The amount of insurance necessary will vary from professional to professional. Factors to consider when determining the limits of coverage include the size of the business, such as the number of employees, the common risks that the industry faces, prior claim history and the location of the business.

The cost of the policy is dependent on some of the same factors that are considered when determining an appropriate limit of coverage. These factors include the breadth of coverage provided, the limits selected, the size of the company and number of employees, revenue, business location, claims history and deductible.

Deductibles can range from $1,000 to $25,000 or more. The deductible will either apply to both the claim expenses and settlement or judgment, or it will apply to only the settlement or judgment.

There are two types of professional liability insurance: claims made and occurrence. In an occurrence policy, coverage is provided for liability because of a wrongful act that occurs during the policy period, no matter when the claim is made.

In a claims-made policy, coverage is provided for liability for a wrongful act if the claim for damages or loss is first made during the policy period. The claim must be a demand upon any insured for loss against any insured.

Another factor that can determine whether there is coverage for a liability claim is a retroactive date. To be covered, all claims must occur after a retroactive date.

Professional liability policies cover acts, errors and omissions that arise from negligence, breach of contract and breach of fiduciary duty. Claims that allege intentional wrongdoing and dishonest acts are usually excluded.

Defending a lawsuit, even a baseless lawsuit, is expensive. Professional liability policies will pay the costs of defense. The policy also includes indemnity, meaning that a judgment or settlement will be paid by the insurer. Both defense costs and indemnification are subject to the applicable policy limit.

In some instances, claims are not made until after a claims-made policy has been canceled, lapsed or non-renewed. An extended reporting period is an optional coverage extension for a claims-made policy that provides additional time for an insured to report claims arising from a prior wrongful act. Extended reporting periods are also known as tail coverage. Insurers often provide an automatic extended reporting period of 30-60 days after a policy has ended. Supplemental extended reporting periods can be purchased. Typically, they extend the reporting period by one to five years.

Occurrence-based professional liability policies do not need an extended reporting period because coverage is available if the wrongful act occurred during the policy period. An extended reporting period often costs between 100% and 300% of the final premium. This depends on the length of the extended reporting period.

Directors & officers insurance is a type of professional liability coverage. It protects the directors and officers of a company if they are sued for decisions company leaders make. D&O protects the personal assets of directors and officers. Like a professional liability policy issued to an attorney or doctor, a D&O policy can include coverage for legal fees and settlement or judgment.

An insurance agent has several duties to its customers when assisting them in placing insurance. For example, they may have duties when the customer informs the agent of a claim. One reoccurring E&O claim against agents involves failure to submit a claim or relevant documents to an insurer on behalf of a customer.

On one occasion, an agent's professional liability policy came into play when an agent was advised by its client of a potential claim. Sometime later, the client provided a copy of a lawsuit that had been filed against it to the agent. It said that the client did not directly advise its insurer of the lawsuit—they were relying on the agent to forward it to the carrier.

The agent failed to notify the insurance carrier and a default judgment was entered against the agency client. The agent has liability for failing to forward the lawsuit to the carrier. However, the client may also have liability for failing to send the lawsuit to the carrier, especially if a claim handler had already been assigned and in contact with the agency client. To avoid this situation, whether or not a client specifically asks, an agent should always send a lawsuit against its client to the client's carrier.

Cara Gates is a claims specialist employed by Swiss Re Corporate Solutions America Holding Corporation. Insurance products are underwritten by members of the Swiss Re group of companies (“Swiss Re").

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of Swiss Re and/or its subsidiaries and/or management and/or shareholders.