Professional Liability (E&O) Insurance

The insuring agreement covers a claim for a negligent act, error or omission in the performance of professional services, as those services are defined on the declarations page. The definition is the whole policy: an engineering firm's policy covers engineering, and if the firm starts doing construction management, the new work is uncovered until the definition is broadened. Damages are the client's financial loss, which can include the cost of redoing the work and the profit they lost. Defence costs are paid either inside the limit, which erodes what is left for the settlement, or outside it; the difference is worth a great deal.

Most forms also pay for things that are not lawsuits: a licensing board complaint, a subpoena for your files in someone else's dispute, or a demand letter that never becomes a suit. Those extensions carry their own small limits and are the claims a small firm actually sees.

Almost every professional liability policy is written claims-made: it responds to claims first made against you during the policy period, whenever the work was done, as long as the work was done after the retroactive date. A general liability policy is the opposite: occurrence-based, looking at when the injury happened. The retroactive date is set when you first buy coverage, and each renewal should carry it forward unchanged; a policy that resets it to the new inception date quietly wipes out cover for every job finished before that day.

The practical rule is that a claims-made policy protects you only while it is in force. Cancel it, let it lapse, or retire, and a claim that arrives next month for work done last year has no policy to land on.

An extended reporting period, called tail coverage, solves the lapse problem. It is an endorsement that keeps the expired policy open to receive claims for a set number of years, or indefinitely, for work done before the policy ended. Carriers include a short automatic tail at no charge and sell longer ones for a one-time premium. The tail must be bought within a short window after the policy ends, and the option disappears if the window is missed.

You need a tail when you close the firm, retire, sell the practice, or move to a carrier that will not honour the old retroactive date. You do not need one when the new carrier picks up the prior acts, which is the ordinary outcome; the analysis confirms it on the new declarations before the old policy is cancelled.

The policy carries a per-claim limit and an annual aggregate, and a retention, which works like a deductible but is paid by you toward defence costs as well as damages. Contracts name the per-claim figure they want, and design professionals working for public bodies are asked for more than a consultant serving small companies. Most of the money in a professional claim is spent on lawyers before liability is decided, so a low retention costs more in premium and is often the right buy for a small firm.

Many forms include a consent to settle clause, so the carrier cannot settle without your agreement, and some pair it with a hammer clause, under which refusing a settlement the carrier recommends leaves you responsible for costs above that figure. Read for both before you buy.

The two policies split the world by the kind of harm. General liability pays for bodily injury and physical property damage caused by your premises, operations or completed work, on an occurrence basis, and excludes professional services. Professional liability pays for financial loss caused by your professional services, on a claims-made basis, and excludes bodily injury and property damage on most forms. A consultant needs both if clients visit the office and a contract asks for both; a home-based sole practitioner who never meets clients in person may be served by a professional policy alone. Where an error causes physical damage, the two policies can argue over which responds, which is a reason to carry both with one carrier where possible.