If you represent yourself as an expert in
your field, mistakes can be detrimental to
your business. Noreen Salas, executive vice president of risk management for Royal
Marine Insurance Group (RMIG), says professionals whose clients rely on them to provide advice should include a professional
indemnity policy as part of their business
insurance plan.
Professionals are expected to have extensive knowledge or training in their particular area of expertise. They are also expected
to perform the services for which they were
hired, according to the standards of conduct
in their profession. If they fail to use the
degree of skill expected of them, they can
be held responsible for any harm they cause
to another person or business.
When liability is limited to acts of negligence, professional liability insurance may
be called ‘errors and omissions’ liability.
“Professionals in health care, legal, architecture, accounting, engineering and service
businesses (e.g. consulting or investment
firms) should examine their need for such
coverage,” says Salas.
Smart Business spoke with Salas about
how professional indemnity insurance can
safeguard the prosperity of your business.
Why would business owners need professional indemnity in addition to their existing
insurance?
We are in a society that is quick to sue and
litigate, and defending and/or settling those
liability claims can be costly. 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.
Depending on your trade, your state and
local governments may require you to carry
professional liability coverage (e.g., most
states require medical doctors to have malpractice coverage). As well, it is common
practice for government agencies or private
companies to require this coverage when
awarding contracts.
What should you look for in a professional
liability policy?
Occurrence and claims-made are the two
main types of available policies. With an
occurrence policy, coverage is for an incident that occurs while the policy is in force,
regardless of when the claim is filed. This
coverage is not cheap, as you can imagine. If
a claim is filed this year for work done 10
years ago when you were insured, you’re
still covered even if you’re no longer in operation. Also, the policy limits in force at the
time the policy was purchased would apply
today — 10 years ago, $500,000 may have
been enough, but may be insufficient today.
In a claims-made policy, 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 is no coverage, regardless of if the claim occurred
while the policy was in force. The benefit of
a claims-made policy is that it is more
affordable for young or start-up companies.
Also, consider supplemental insurance,
such as ‘tail’ and ‘nose’ coverages, which
are available to fill the gaps of a claims-made policy.
How much coverage does a business need?
Usually, it depends on the industry you are
in and the volume of business you conduct.
It is generally based on gross receipts. If
you deal with many high-profile companies
and you’re working on projects that are
quite substantial, it would be best to get
higher limits to make sure you have adequate protection.
Typically, you pay legal expenses up to
your deductible. In some policies, legal
defense costs are outside of your deductible
— they will cover it from zero dollars on up.
Policies with zero dollar deductibles are
more expensive. But if you require defense,
not only will they pay from the first dollar on
up, but it also won’t affect the limit of liability. In other words, if you have $100,000 in
defense costs, which can easily happen, and
you have a $1 million policy, the face value
of your policy will not drop to $900,000
should you be found guilty or have to pay or
contribute to a loss.
Another factor to consider is loss of earnings. If you have to spend time in court as
part of the defense, then you’re probably not
generating income.
What advice can you give someone who isn’t
sure what type of limits or deductible they
should get?
The deductible really has to do with how
much financial hardship can be tolerated.
Also, factor in the frequency of claims in
your industry. It depends on where you
stand financially. You have to realize that if
there is a loss, you are going to have to pay
that amount of money out of your pocket
if the policy you purchased does not
include first-dollar defense. In terms of limits, consider the size and scope of the projects. There is not a formula, per se; you
have to review your policy with an agent to
ensure limits are in line with the state of
your business.
Bottom line, insurance should always be
an integral part of your business.
NOREEN SALAS, AAI, is the executive vice president of risk management for Royal Marine Insurance Group. Reach her at (305) 477-3755 x208.
