Professional
Liability insurance, also known as Errors & Omissions insurance
(E&O), provides coverage to defend and indemnify the design
professional against claims alleging negligent acts, errors or omissions
in the performance of professional services (Wrongful Acts).
Wrongful Acts
are not limited to defects in plans and specifications. Coverage
usually extends broadly to encompass most of the professional services
rendered by architects, engineers, and other design consultants. The
Professional Liability policy is meant to pay on behalf of the design
professional those damages that the design professional is legally
obligated to pay as a result of a Wrongful Act.
The policy
deductible usually applies to each claim, and may or may not apply to
the cost of defense. The policy limit of liability typically includes
defense costs, meaning that the limit is eroded and can be exhausted by
legal fees and other defense costs. Careful consideration should be made
when deciding on an adequate limit of liability.
Policies
typically exclude express warranties or guarantees; obligations under
worker's compensation laws; claims by employees for employment practices
and; the costs to repair/replace faulty workmanship on construction
performed by the insured. As with all insurance policies, it is
important to read the exclusions to see how they may impact your
business.
Professional
liability coverage is written almost exclusively on a "Claims Made"
form. Once the policy is canceled or non-renewed, all coverage will
cease. In order to establish coverage, three conditions must be met:
- A policy must be in place at the time a claim is made
- A "retroactive" or "prior acts" date on the policy must be dated at
least as far back as when the services giving rise to the claim were
provided;
- A notice in the appropriate form must be provided to the
insurer within the policy term or during a grace period that might be
thirty or sixty days after coverage termination (this last should be
defined within the policy form).
Few, if any,
policies will provide retroactive coverage to the previously uninsured
firm. It is therefore advisable to begin a professional liability
insurance program as early as practical in one's practice.
