Introduction
Professional liability insurance is a type of commercial liability insurance. It is meant for the protection of professionals from any probable claims of clients or third parties in future. Such insurance is for services exactly what product liability insurance is for products. It insures an individual or company in case of any claim raised by a third party for negligent work, errors or omissions, or any wrongful deed in the course of providing any professional services. Like other insurance products, such insurance also comes with the guarantee of hedging against all uncertain risks and contingencies. The idea is to protect professionals from liability arising from an unintentional error or negligent act, inadequate and not up to the mark work as conceived by the client and it provides coverage of the defense cost in case a client or third party brings up any litigation.
Various nomenclatures
In various fields different nomenclatures have been used for #ProfessionalLiabilityInsurance. It is more popularly known as Errors and Omissions insurance or simply E&O insurance, but when it relates to professionals from the medical industry, it might also be called Medical Malpractices Insurance. In India, some insurance providers call it Professional Indemnity Insurance. Because of the identicalness of meaning, the terms professional liability insurance and #E&O insurance have been used interchangeably in this article.
Professional liability insurance: The Rationale behind
Professionals have specialised knowledge and expertise to deliver services in a specific area and for that they are hired by clients. They are expected to take due care and exercise proper diligence and produce the best results for the clients by using the highest level of efficiency in conduct of their duties. But no one is perfect and therefore mistakes will be committed. So they say “To err is human…” and the same holds true almost in every business transaction. The chances of errors, mistakes, omissions, negligence etc. are not ruled out in such transactions and such an act may cause financial losses to the client. Consequently the aggrieved client may sue the professional, who may be an individual or a company, for damages. Such insurance cover saves the insured from bearing this cost and the loss is transferred from his balance sheet to that of the insurer. After all even if the professional is not guilty, litigation is not only expensive but also time consuming. Time is money. Hence, not buying an E&O insurance implies he is taking a serious financial risk.
Examples of Professional error
The number of possible professional errors is infinite. While some of them may be insignificant some might have grave consequences. The following are some examples of professional error from various fields with varying degrees of implication:
A transporter sending a valuable and time sensitive consignment to a wrong destination. There is an intangible loss of reputation for both the professional and the client. In such case, who will pay for the loss? And what about the loss of future business from this client.
A plastic surgeon destroying the face of a client. This need not be intentional; there is nevertheless huge loss to the client.
Selling a virus affected software to client and causing break down of his entire computer system.
A wedding manager booking the reception hall on the wrong day and guests turning up on the wrong day. If so happens it costs the client not only money but also injury to reputation. That apart, the mental distress of the bride and the groom is beyond repair.
A financial adviser advising a client to buy certain stock stating that its price is likely to increase, but the stock price decreases and the client loses a lot of money.
Out of the above cases of professional errors, while some of the professionals might just be lucky to escape a lawsuit from client, others may not be. It is possible that some clients will at least sue the professional.
Professionals covered
Generally professional liability insurance covers professionals like Chartered Accountants, Company Secretaries, lawyers, financial planners, accountants, doctors, dentists, physiotherapist, insurance brokers, real estate brokers and agents, investment advisors, computer hardware and software professionals, website developers, surveyors, advertising professionals, architects etc. A professional should consider buying such insurance policy if there is the slightest possibility of his clients or third parties suing him in the court for damages against wrongful commission of his duty or any error or omission or negligent work.
Costs that are covered by the insurance
E&O #insurance covers the entire cost of defense or settlement including legal fees and court cost up to the limit specified in the insurance policy. However fines and penalties are not covered. Again only civil liability claims are entertained by such insurance and any liability arising from an act of criminal nature, like something illegal, is not covered. Also not covered is any claim arising from a mala fide act or an intentional wrong committed. Like all other insurance policies, the E&O #insurancepolicies also cover a certain period of time and claims made during the policy period only are entertained. Claims from any services rendered before the commencement of the policy are not accepted. This concern acts as a positive incentive for the insured professional or company to keep renewing the policy from time to time.
E&O Insurance Exclusions
In general, a professional liability insurance (PLI) policy does not cover the following:
Intentional wrongs and intentional violation of law.
Dishonest acts
Services provided by insured under the name of another entity not named in the policy
When one insured person sues another co-insured
Infringement of copyright, patent or trademark infringement
Physical harm or injury to another person
Damage to property
Defamation - Libel or slander
Act creating pollution
Malicious prosecution
A liability undertaken in a contract that would not have been there without the contract
Fines, penalties or damages
Cost of premiums
The #premium cost of E&O insurance policies will vary from professional to professional and from insurance company to insurance company and factors like type of business, location, claims history of the individual as well as the industry in general etc. Claims history is important, but equally important is the fact that the professional might not have had any claims earlier merely because he was lucky with clients. Therefore it is equally important to see why a person did not have any claims. Was it because he was really providing good services? And if he has had claims, what steps were taken to ensure non-repetition of similar errors. For this depending upon provider, a provider may ask for copies of contracts, details of quality control measures adopted, method of documentation etc. or just nothing but a properly completed application.
PLI in the presence of Business General Liability insurance
General liability insurance policies entertain claims with respect to physical loss or damage to property or personal injury only. But a loss arising from a professional service taken does not necessarily take any of these forms. Example of a loss arising out of #professionalservice taken but not belonging to any of the above classes is the loss of expectation. When a professional had promised or purported his services to achieve a certain pre-specified standard and the client to achieve a certain result based on that but due to negligence of the professional, the result was under-achieved, there is loss of expectation on the part of the client. Similarly if an investment consultant advises a client to buy a certain stock because he thinks that these stock prices are likely to go up substantially and on faith of his expertise, a client invests a lot of money but the stock prices come down, the disappointed client feels cheated. He has not suffered any bodily injury. To take another example, a website designed may not be as effective as expected, but it does not cause any damage to property or body of the client for whom it has been designed. But nevertheless, there might be financial losses to the clients due to poor quality of services rendered by the professional. The general liability insurance will not come to help the insured when he makes a claim for neglect or improper advice. #BusinessGeneralLiabilityInsurance also does not cover disputes relating to desired contract performance nor any claims giving rise to professional liability while the chances of suits by aggrieved clients against professionals for the mere reason that an act could not fetch the desired or promised outcome are not ruled out in today’s professional scenario. Needless to say, business houses and individual professionals not taking such a cover do take up huge personal risk. The rationale is simple, despite undertaking due care and exercising proper diligence, chances of inadvertent mistakes and unnoticed errors are never wiped out. This insurance cover also protects an individual or company from claims arising out of errors or omissions of any employee or independent contractor hired. These apart, the insurance also protects professionals from loss of clients or loss of reputation and goodwill.
Professionals who are most prone to risks are those from the financial sector. When advising a client to invest in certain funds, a financial consultant or investment advisor makes them aware of the risks involved, but in reality no matter how diligent he has been and no matter how good advices he has given to his clients, disappointed clients always come up with lawsuits even if there be no strong ground. If the decision of the court goes against the professional, the financial cost to him is likely to be exorbitant. Even if the court’s decision is in his favour, the court fees may swallow up his entire professional earnings from the particular assignment. E&O insurance is therefore vital. While pricing the premiums, the insurance company pays attention to litigation history of the insured and accordingly insurance premiums may be quite on the higher side for those with a track record of many claims. They are also likely to have less favourable policy terms from the provider.
Appropriate time to buy the policy
Buying PLI insurance policy is an effective way of risk management. The ideal time to take such a policy is at the time of commencement of rendering professional services. Every business is exposed to some kinds of risk. It is definitely worth the pain to identify all those risks afore-hand and formulate an ideal risk management strategy.
For professionals belonging to certain areas, e.g. the medical professionals, the errors and omissions insurance is compulsory in some countries. Before starting to render professional services against fees, a professional has to check up the legal provisions to see whether or not he needs a compulsory E&O insurance. If they forget, there are no worries at all as most clients are quite aware of their rights and before starting to do business with a company or professional, they generally put a condition on them to take the insurance. Taking up E&O coverage is also an important criterion for bidders of various government contracts. However, even if a company or individual is not legally required to have this insurance coverage, it is nevertheless wise to do so.
Insurance is definitely expensive for individual practising professionals. If they are working with micro level clients that entail limited risks they do not need to bother about E&O insurance. But those working with big clients on high risk projects definitely need cover. So the test is if the professional is aware of and comfortable with risks associated with his services, he/she may do without insurance. However, as business grows, it is important to make fresh necessity analysis for insurance.
Standard Policy Format
There is no standard policy format for PLI or E&O insurance policies. A lawyer, a doctor, a #companysecretary and a software engineer – all as professionals are exposed to risk, but their individual risks are different from each other’s. Therefore, the same ‘standard’ policy will not work for all these professionals. In other words there is no ‘Free Size’ policy fitting all. Each policy has to be read carefully to see that the specific risks of the professional are covered. For this a professional needs a clear understanding of what kind of risks he is exposed to. He then has to find a policy that addresses most of the risks, if not all. Those risks that do not get covered should be regarded as a part of business risk or managed in some other way.
A word of caution
Buying professional liability insurance is not a license to start neglecting one’s professional duty. A professional needs to diligently follow certain steps to prevent the problems before they occur. This will help mitigate claims:
The need for written contracts cannot be undermined. A professional should always stress upon having a written contract clearly specifying the standard of service, what will be done, what will not be and what the fees for the service will be. This will leave no room for abnormal expectation.
Keep communication alive with the client throughout the assignment and help the client keep the expectations realistic.
For assignments having a larger financial implication, it is better to have quality control in place by using internal and external audits regularly.
False promises, misleading information or abnormal guarantees by professionals are the cause behind the majority of lawsuits against professionals. A professional should never guarantee anything over which he does not have complete control.
And finally, there is nothing like keeping a check on errors and omissions. It is necessary to reduce everything into writing and getting them authenticated. This will substantially reduce risk of lawsuits.
Company Secretaries in Practice
The profession of company secretaries entails a lot of risk and there is hardly any doubt on that point. It is possible for aggrieved clients to litigate. Suits may also be brought up for errors and omissions leading to financial losses of clients. To take examples of a few areas of work of #practisingcompanysecretaries that bear chances of risk: secretarial audit reports, compliance certificates, corporate governance reports, certificate issued for the purpose of issuing prospectus by a company, certification of e-forms etc. In these documents and certificates there are definitely chances of negligence, oversight, errors, unintentional misstatement and omissions and the same might create ground for suits in future from clients and third parties. From the above discussion it is clear that Practising Company Secretaries also need protection with such insurance cover. Until the publication of my first article in this regard (2011), a cause for concern for our fellow professionals was that the profession of company secretaries was not recognized by any of the India based insurance providers as a profession bearing business risk and that an aggrieved client may sue the practising company secretary for negligence in his work. Almost all the providers of Professional Liability Insurance in India at that point of time provided the cover to chartered accountants, lawyers, engineers, architects, financial and management consultants, doctors, dentists, and other medical professionals like physiotherapists, but none of them had enlisted company secretaries as beneficiaries. I am happy to see that my work in this field and many articles relating to the need of such insurance cover for CS (2009-2012) has borne fruit and today many Insurance providers provide coverage to Company Secretaries also. That’s indeed good news!
Concluding remarks
Developed countries of the world have been much creative and have gone a long way in devising newer and more useful insurance products that have been launched from time to time with much success. In India, Insurance companies have done their best to mimic them with more or less success. For a decent number of years numerous articles in a plethora of journals and newspapers have boldly stated that “insurance market in India is still at a nascent stage…” and that we have a long way to go. But we do not any longer need to take cover under this blissful ignorance. The insurance market in India has come a long way in the last decade introducing many customized products for various types of beneficiaries. However, there is still a long way to go as far as awareness about them is concerned. The Professional Liability Insurance schemes have been launched by many premier insurance providers in India, but the list of beneficiaries is still far less exhaustive as compared to their western counterparts. Many professions still do not feature in the list of people eligible to take the cover. Such schemes have, therefore, to go a long way before they gain the required popularity. So said, we professionals also need the foresight to understand the risks we are likely to face in future and take steps ahead of time. Such type of insurance is a necessity for professionals like us. An institutional approach by #ICSI to getting its members insured in a structured manner may also go a long way in strengthening the profession.
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More than a decade ago two master articles were authored by me on the same topic as follows:
"Hedging against contingencies with Professional Liability Insurance" in EIRC Newsletter, October 2010
"Professional Liability Insurance - Desideratum for Company Secretaries" in Chartered Secretary, July 2011
Both these articles have have played a major role in the expansion of beneficiaries by most Insurance companies to include Company Secretaries.
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