Almost every business or firm can become liable for injury to others resulting from a condition on its premises or arising out of its operations, products, completed work or actions of its employees. Providing coverage for those exposures is the purpose of various forms of liability insurance. Persons or organizations that render professional services face an additional liability exposure – their failure to use due care and the degree of skill expected of a person in a particular profession. Coverage for this exposure is known variously as professional liability insurance, or errors and omissions liability insurance.

Professional liability insurance is not restricted to liability for injury caused by an occurrence-that is, caused by an accident. In many cases, the professional will do exactly what he or she intends to do. Malpractice is an example – an intentional act with the end results ending not as intended! Many times the coverage wording will be stated as "a wrongful act". Noteworthy is that none of the professional insuring agreements are framed in terms of "bodily injury or property damage". Coverage here must fall within a different type coverage, most commonly, general liability insurance. Professional liability insurance will usually come in the coverage form known as "claims-made". Care must be taken to examine the 'reporting provisions' of a claims-made policy for 'reporting time' and the 'designated claims receiver'. A policy set up on a claims-made basis will mean that the policy only covers claims made during the policy period. They are very much unalike an occurrence policy format. An additional fact with a claims-made policy is an occasional 'retroactive date' simply requiring that "claims must be made during the policy period but which relate to an incident after the retroactive date.

Finding a 'standard' professional liability policy will be a useless search! There are no standard policy wordings for E & O coverage. Each policy must be read carefully to make sure the coverage offered fits your exposures. Costs of a professional liability policy may vary greatly depending on the classes of business, location, claims experience, and from insurer to insurer.

Care must also be taken to examine the various conditions and clauses that are contained with each particular policy. Many professional liability policies will contain a "Hammer clause"- also known as the "cooperation clause" or "consent to settle" clause. A 'hammer' clause will generally contain two elements: (1) it requires the insurer to obtain the consent of the insured prior to settling a claim, and (2) in the absence of the insured's consent, it limits the insurer's liability to the amount of a plaintiff's approved settlement, plus defense costs to the date of the withheld consent. Make sure that this clause is understood and is clearly written. Any clause that is vague or open to interpretation should be rejected.

Some policy provisions are more 'friendly' and contain clauses that are truly beneficial. A "non-practicing" extension can be one such clause. A non-practicing extension provides extended reporting periods under claims-made professional liability policies – for 'no charge' and for an unlimited duration – under three circumstances as follows: (1) when an insured dies, (2) when an insured retires, and, (3) when an insured becomes permanently disabled. If an insured has had professional liability coverage written on a claims-made basis throughout the course of his or her career, it will be necessary to continue coverage even after he or she is no longer practicing. This is because under claims-made policies, for coverage to apply, a policy must be in force on the date when a claim is made against the insured. Most claims-made policies will offer "tail coverage". These are extensions to the reporting provisions in a claims-made policy allowing an insured to report a claim after a policy has terminated, providing the claim was the result of an act that took place while the policy was in force. Normally the extended reporting provision is priced at 75 to 150% of the expiring annual premium. As noted above, non-practicing extensions provide 'erp' coverage at no cost and for an unlimited duration subject to the three circumstances listed above.

Nearly all non-practicing extensions are contained within four lines of professional liability insurance: physicians, attorneys, accountants, and architects/engineers. The retirement and disability conditions may differ from insurer to insurer.

As a final note, take the time to determine whether the professional liability policy you are purchasing is an 'occurrence' form or a 'claims-made" form. The insurance industry does still offer an occurrence form on various types of businesses. Cost may be greater that a 'claims-made' form and the type of risk covered may be restricted but there are factors that can affect the final price. With an occurrence form there is no need to factor in the purchase of an extended reporting endorsement. This alone can be significant! Choose your coverage and insurer carefully.

Article By: Dennis Gambill - The author is an Insurance Litigation consultant. Adjunct professor at EMC for 8 years-Risk & Insurance. 40+ years-both MGA and agency experience.