August 3rd, 2020
General liability and professional liability (often referred to as professional indemnity or errors & omissions) are two common forms of insurance that work together, forming a comprehensive risk management solution for all types of businesses.
It’s no secret: We believe every organization should purchase general liability insurance. The coverage is so broad, and the consequences of bodily injury and property damage are so enormous, we think it is a must-have for any business. Whereas, not every business needs a professional liability insurance policy.
When considering these types of insurance, it is not a question of, "Which one should I purchase?" but instead, "Does my business need professional liability in addition to general liability insurance coverage?"
And yes, even though we do recommend general liability for every business, for some businesses (such as lawyers, architects, and doctors) the primary exposure is professional liability. In those instances, we still suggest getting insurance for both general liability and professional liability risks.
To understand what you need, you should know the differences between the two. Let’s go over them below:
When looking at the differences between these two insurance policies, the first thing to check is the "insuring agreement." This is the overarching agreement regarding the claims the insurance policy promises to cover.
For comparison's sake, here is a real example of an insuring clause from a client of ours. They purchased both professional liability and general liability from the same insurance company.
Each insuring agreement reads as such:
1) Professional Liability: "The insurer will pay damages and claims expenses by reason of a claim first made against an insured during the policy period for a professional incident which first occurs on or after the retroactive date and prior to the end of the policy period."
2) General Liability: "We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’ to which this insurance applies."
As you can see, each policy promises coverage for two separate situations:
The professional liability policy covers "professional incidents."
The general liability policy covers "bodily injury," "property damage," and "personal and advertising injury."
The general liability policy is pretty straightforward; it covers bodily injury and property damage with a few extra coverages in personal and advertising injury. The professional liability policy is a little more cryptic.
You might be asking, what is a “professional incident?”
If you look further into the policy in the definitions section, a "professional incident" is defined as the following: "... any error, misstatement, misleading statement, act, omission, neglect, or breach of duty, including personal injury, actually or allegedly committed or attempted solely in the rendering of or failure to render professional services."
In short, professional liability covers incidents involving a mistake you made in the rendering of your services. General liability covers property damage and bodily injury that resulted from your actions.
Professional liability developed due to the lack of coverage general liability provided to claims that didn't involve either bodily injury or property damage.
Because professions like lawyers, doctors, architects, consultants, and real estate agents derive most of their risk from disputes not involving either bodily injury or property damage, the professional liability policy came to be.
These are good examples of professions that have an incredible amount of professional liability risk. However, if your business is exposed to an allegation of negligence, misrepresentation, violation of good faith, or inaccurate advice, a professional liability policy could provide you with additional needed protection.
Here are some lesser-known operations that could expose your company to a professional liability lawsuit:
In the scope of your business operations, you might hire a wide variety of subcontractors to fill a specific skillset or provide additional resources for a job you are working on.
What if you hire a subcontractor that goes bankrupt before finishing the project? What if they do not complete the project correctly, resulting in financial harm to your client?
A professional liability policy could provide coverage for your mistakes in hiring contractors not fit for the job or errors in the supervision of subcontractors while working for you.
Most businesses provide advice in some capacity. Their clients rely on the expertise they bring to the table. Your business relationships rely on this value, but it comes with risk.
For example, a vacation resort might hire a pool contractor that suggests and installs an undersized pool pump. As a result, the pool isn't functional for an additional two months during peak season. Since the pool is critical to the popularity of the resort, it was unable to stay 100% booked this year.
There was no property damage or bodily injury. Even so, the client was financially harmed by not having a working pool. This is an example of how a business that appears to have little professional liability exposure could get involved in one of these disputes.
When building or manufacturing certain products, there is a chance that you might use materials that do not perform the way they are intended. Often this is because they are defective.
Let's say you are a manufacturing business that machines products used in large oil refineries. You’ve used the same vendor to source raw material for years. At some point, when you manufacture the product and it is installed in the refinery as planned, the product isn't strong enough to be safe. This causes the oil refinery to be inoperable for two days.
Your products didn't cause any property damage or bodily injury. Only financial harm occurred because the refinery was unable to operate. As a result, this would be a risk covered under professional liability.
Although it isn't always the cheapest solution, we recommend that you purchase general liability and professional liability from the same insurance company.
Sometimes claims can involve bodily injury that results from a professional service that you rendered or maybe a claim could fall under either policy. It is not always clear cut which policy should be paying for the claim. And if you have two different insurance companies, they will fight over which one should pay for the claim.
In a scenario where the same insurance company insures both coverages, there is no arguing who should pay for the claim. This leads to a much quicker, more positive outcome.
Plus, chances are if you purchased coverage from the same insurance company, the two coverages were designed to work smoothly with each other, resulting in a better insurance program.
Professional liability lawsuits are never clear-cut and often require significant legal bills to resolve. In many cases, the costs to hire a legal team to defend you can cost significantly more than the claim itself.
Although a general liability policy with unlimited defense costs is an industry-standard, finding a professional liability policy with unlimited defense costs is much more difficult. We always recommend that you at least request this coverage. If it is unavailable, you should adjust your limits of liability to be enough to cover the costs of a claim plus legal defense costs.
Insurance premiums are based on exposure to risk. If you are an architect designing high-rise buildings and bridges, your exposure to professional liability risk is much higher than a plumbing contractor. That being said, a plumbing contractor of similar size would likely have a higher general liability premium.
General liability and professional liability policies generally start at $500 per year and rise depending on size and exposure to risk. If you bundle the premiums with the same insurance company, you might even be able to get a multi-line premium discount!
General liability and professional liability are both common insurance coverages; when paired, they cover a wide variety of business risks. Instead of limiting yourself to purchasing “either/or,” ask yourself, "Does my company need professional liability in addition to general liability coverage?"
If you want to talk to an expert about whether your company would benefit from a professional liability policy, or just want to know more about your business’s risk, schedule a meeting with one of our risk advisors. We can review your operations and give you honest advice and recommendations for coverages.
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