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Frequently Asked Questions about Professional Liability Insurance

Provided courtesy of the Professional Liability Agents Network (PLAN)

Q: What is "professional liability insurance"?

A: Professional liability insurance is also known as "errors and omissions" insurance or "malpractice" insurance. It is purchased by architects, engineers and environmental consultants -- as well as doctors, lawyers, accountants, brokers and other licensed professionals -- to address business liability risks that are not covered by their commercial general liability (CGL) policies.

Q: Why should I buy professional liability insurance?

A: For several reasons:
• To protect your firm and employees from serious financial disruption.
• To provide your clients with financial security for your design and consulting services.
• To access projects and clients that you may otherwise miss.
• To receive loss prevention information and consultation.
• To have a "damage control" team available should problems arise.
• Because your client requires it.
• For your peace of mind.

Q: What does it cover?

A: The policy pays other parties for damages which you are legally liable to pay as a result of negligent acts, errors or omissions in the performance of your professional service. Those damages can include property damage, bodily injury, economic loss and legal expenses. The insurance company has an obligation to defend you against such claims, even if the allegations ultimately are determined to be false or groundless.

Q: How does it work?

A: Policies are generally written for a term of one year on a "claims-made" or "claims-made and reported" form. These policies cover only those claims made against you and reported to the insurance company during the policy term and any extended reporting period, subject to the retroactive date on your policy. The retroactive date is the date after which the professional activities of your firm are considered to be covered by the policy. This may be the date on which you first purchased and have since maintained continuous coverage, the inception date of your firm, or some other date offered by your insurer. Remember, the insurance company covering you at the time the claim is made is the one to look to for protection, not the company covering you at the time of the alleged error.

The amount of coverage depends upon the policy limit you choose. It is also subject to your payment of the deductible amount for each claim.

Q: What does it cost?

A: There are many factors involved in premium determination: the limit and deductible you choose, your discipline, and your firm's size, projects, services and clients. Of course, claims history counts a lot, as well as your firm's professional track record and business practices.

Q: What is the difference between a professional liability policy and a commercial general liability policy for design and environmental professionals?

A: A professional liability policy for design and environmental professionals covers their negligent acts, errors or omissions in performing professional services (such as mistakes in the preparation of plans or specifications, in rendering their professional opinions, surveying errors or a failure to provide services in accordance with the normal standard of care). A commercial general liability (CGL) policy covers non-professional activities, both inside and outside their office premises (such as when someone coming to their office slips and falls).

Q: What is the difference between a claims-made and an occurrence type policy?

A: Professional liability insurance is written on a claims-made or claims-made and reported basis subject to the policy retroactive date. Claims-made professional liability policies only cover claims made against consultants and reported to the carrier during the policy period. Commercial general liability insurance policies are written on an occurrence basis because the date of accident or occurrence is readily ascertainable. The occurrence is covered by the policy in force on the date of the event (bodily injury or property damage) no matter how long thereafter the claim or suit is brought.

Q: Is professional liability insurance available to cover just one project?

A: Yes, some carriers offer project specific insurance. Project insurance usually provides non-cancelable coverage for a pre-selected number of years for the design and construction period as well as a discovery period after construction is complete. Coverage can begin with design or when construction begins and can extend up to five years after the construction period has ended. Limits are dedicated to the project and cannot be reduced by claims against the firm from other projects. Usually the entire design team is named on a project policy. Residential projects no longer qualify for project insurance. These policies are usually written for projects with construction values of $2 million or more.

Q: Do clients/owners pay the premium for these types of policies?

A: Yes, normally, since the client is the major beneficiary of this type of coverage. This is usually negotiated with the prime consultant.
Any more questions? Contact your PLAN agent in Hawaii.

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