PROFESSIONAL LIABILITY COVERAGE

Professional liability coverage protects if you're sued for the work or advice provided by your business. You may also hear this coverage referred to as errors and omissions insurance or malpractice insurance. In more legalistic terminology, professional liability insurance covers for things like breach of duty, negligence, misstatement, omissions, and wrongful acts.

If you claim you are an expert in your field (or if you can legally be considered an expert), professional liability coverage should be a part of your business insurance plan. Professionals in the following fields should seriously examine the need for coverage: accounting, healthcare, legal, architecture, engineering, software, and service businesses (e.g., travel agents or consulting firms).

Why is professional liability coverage necessary?

Our society is quick to sue and litigate, and liability claims aren't cheap to defend or settle. Professional liability coverage is necessary to protect you and your business if you're sued and found liable. In fact, depending on your trade, your state or local government may require professional liability coverage (e.g., most states require medical doctors to have malpractice coverage). Similarly, government agencies or private companies may require you to have this coverage before they award key contracts.

As a business owner, you may want to require your subcontractors to carry their own professional liability coverage. This is a growing trend in the private technology sector. In other trades, like construction, it's common practice for general contractors to require subcontractors to carry their own liability insurance.

The cost of defending your business in a lawsuit is another reason to carry this coverage. Whether a claim is valid or not, you'll still incur the legal expenses of defending yourself. And if a claim is valid, you'll have the additional expense of paying the claim. If your business doesn't have the deep pockets to handle these potentially large expenses, professional liability coverage can serve as a cost-effective resource.

What types of coverage are available?

Two main types of professional liability coverage are available: occurrence coverage and claims-made coverage. With occurrence coverage, you're covered for any incident that occurs while your policy is in force, regardless of when a claim is filed. So, if a claim is filed this year for work you did ten years ago while you were insured, you're still covered, even if you're no longer in the business. Occurrence coverage is not cheap, and the policy limits in force at the time you bought the policy will still apply today. So, while $100,000 of coverage might have seemed more than enough 20 years ago, that same amount of money may be totally inadequate today.

The other main type of coverage is claims-made coverage. With this type of coverage, you're covered for any claim that is made during the term of the policy. In other words, if a claim is made after the policy expires, there's no coverage, even if the claim resulted from an event that took place while the policy was in force. The advantage of a claims-made policy is that the premium is usually discounted in the early years. So, it can be a good choice for a start-up business trying to hold down expenses. But over time, the premium will increase to more accurately reflect the real costs of insuring your business, usually around the fifth year of the policy.

Because it's hard to know whether a claim will be filed in the future (after your policy expires), insurers offer two types of supplemental insurance that fill the gaps of claims-made coverage. The first type is tail coverage, which covers any incidents that occur while the original claims-made policy is in force but are not reported until after the claims-made policy expires. This coverage is often used when a professional changes insurance carriers, goes part-time, becomes disabled, enters retirement, or dies. Some claims-made policies offer guaranteed tail coverage as an option.

Bryant R. Filter is President of Filter & Associates located at 153 Perry Hwy., Suite 101 Pgh., Pa. 15229. They can be reached at 412-459-0203 or www.filterandassociates.com