Malpractice Isn’t Just a Medical Thing

Professional Liability, or Errors and Omissions (E&O), is a key exposure for businesses. E&O coverage is designed to protect insureds against liability stemming from committing a “professional” error during their process or business services. 

You’re probably familiar with the term malpractice, often referring to claims against the medical or legal industries. Professional liability exposure for white-collar businesses is more of a common topic. It is hard to imagine a doctor or lawyer being sued for any reason that wouldn’t be considered a professional service. In the blue-collar industries, though, this exposure can be a little more confusing. 

What differentiates regular business liability insurance from professional liability? It can be a gray area, and the issue is, for many companies, this coverage is not a part of their commercial insurance program. 

Here’s what we’ve found:

• Many companies believe their commercial general liability policy will cover this type of loss.

• Many don’t think customers’ financial/business losses are their responsibility.

• Many just don’t understand what E&O coverage is and how they are exposed.

The answer is likely a combination of these reasons. Often, true professional liability coverage is purchased as a separate policy or at least a separate line item and limit within the standard business policy.

This is a good time for a refresher on what the typical general liability policy covers for your business. The standard commercial general liability/product liability policy most purchase as part of their package covers them for bodily injury or property damage they cause to a third party. 

For example: If your employee’s actions or your products injure someone or cause damage to someone else’s facility, equipment, etc., the general liability policy will typically respond for the direct costs of those damages. It will pay for the damaged machine or portion of the building or the medical costs associated with the accident.  

Professional liability focuses on the indirect costs. There is a stockpile of costs that a company can face, due to property damages, especially. Consider your own business: things like machine downtime, payroll expenses if employees cannot work, missed deadlines, overtime paid, extra expenses for other vendors, and loss of income. All these extra costs or losses are real consequences for a customer, yet they aren’t covered by the regular general liability policy. If the original issue that caused these things were the fault of your company, it is not unlikely that your customer will seek reimbursement for them from you. You may be on the hook. 

While some of those third-party exposures may seem like the cost of doing business for your customer, the more recent trend is that if the costs are high enough, they will come back to your company. 

In recent years, challenges in the business environment have created higher costs and a more litigious environment. This likely comes as a surprise to no one. Consider operational downtime—lack of skilled labor and supply-chain inconsistency are two major reasons that your business may be down longer than it might have been in the past. 

Contractual agreements play an important role in this conversation as well. Keep in mind that your business may have already accepted this kind of liability without even realizing it. Many contracts, especially with large companies, require proof of professional coverage in the insurance requirements section. If that’s the case and you’re not able to push back on this requirement, you could be in breach of contract if your business doesn’t already have a professional policy.

There are several other places within a contract or purchase order where you may be assuming liability for your customer’s ‘commercial loss’ or ‘economic damages’ even if the insurance section doesn’t specifically request or require the coverage by name. Outside of the “insurance” section, “indemnity” and “failure to perform” are other common areas where important language concerning liability can be found.  

When you sign that contract or purchase order, you have accepted responsibility for these potential costs. Whether you have a policy in place to defend and indemnify the claim or not, your customer has passed the torch to you. Even if you were unaware or disagree with their stance, you likely will at least have defense costs (defense costs are also part of the coverage in a professional policy). So have your risk management team, insurance broker, and attorney review your contractual agreements.

Clear as mud? As always, it is important to communicate with your broker about your business exposures to help identify how professional liability would fit your operations.