Mistakes and Insurance

By Mark Tarpinian
TFI Insurance & Benefits

Have you ever made a mistake? (Certainly every husband since Adam has.) Are you a “professional,” or, even if you are not considered to be a member of one of the typical professions, do you advertise yourself as a “Pro?” These issues address the risk and insurance areas of Professional Liability.

Most businesses retain Commercial General Liability (in the past also known as Public Liability), which covers risks arising out of the maintenance or use of their premises, operations, and products, focusing on Third Party property damage and/or bodily injury. A visitor’s slip and fall at a place of business is a common General Liability claim.  

General Liability policies typically exclude ANY liability arising out of the rendering of professional services, including mistakes such as errors and omissions. The Personal Liability provision of a Homeowners Insurance Policy, even when endorsed to cover incidental professional occupancy, will not cover “malpractice.” Did you forget to or mistakenly advise a patient of a medical procedure, or a client of a tax provision, or a homeowner of a safety railing on a porch, or a restaurant of an exhaust vent, or a building owner of a boiler, or a business of the use of software or programming code? Did any of these allegedly result in a physical, mental, and/or financial injury to the client or customer?

A special form of liability insurance, or endorsement, covers these “professional-error-omission” risks and claim situations, imaginatively termed Professional Liability. Different forms are usually issued to the various professions, sometimes known as Errors and Omissions policies or endorsements, but their intent is similar. Both cover exposures to claims arising out of the rendering, or failure to render, a professional service, including the popular tort of “malpractice.” When considering the risk of a professional service, think of the old Armenian saying, “You are damned if you do and damned if you don’t.”

Professional Liability policies generally follow a similar format as their General Liability policy brethren. But the insuring clause and declaration page are adapted to cover the particular professional insured. For example, the policy’s Coverage Declaration cites a specific Business Description as “Group Insurance Consultant” with the Insuring Agreement stipulating:

“To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensatory money damages as a result of claims made and reported during the policy period by reason of any act, error or omission in professional services rendered or which should have been rendered by the Insured or by any person for whose acts, errors or omissions .. and arising out of the conduct of the Insured’s profession.”

In contrast to General Liability policy forms, Professional Liability/E&O policies are usually issued on a “claims made” basis. For a claim to be covered, the alleged error or omission must be covered by the policy, must have occurred on or after the retroactive date of coverage, and before the policy’s expiration date. In other words coverage must be in force at both the time of the claim occurrence and when it is reported. Reporting can follow years after the alleged claim happened. To ensure protection, you must continue your coverage long after your service is complete, even after retirement.

Obvious professions include doctors, lawyers, accountants, and architects and many of their mistakes, and legal awards, entail highly publicized media exposes.  But most businesses provide some form of “professional service,” and the following are examples of less publicized situations but highly detrimental to various small businesses:

*Massage & Spa Business: Rose Spa and Salon was scheduled to host Mary’s bridal shower party for a two hour massage and day spa session for all nine bridesmaids. Due to a booking error the morning of the appointment, Mary received a call from Rose Spa saying they needed to reschedule for the following week. Mary was furious as she had paid for four of her guests to fly in from out of state to attend the event. She was unable to find another venue at such short notice and sued the spa for $1,600 to recoup the airline fees for the booking mistake.

*Dental Hygienist: Steven is a dental hygienist working for Dr. Muller. While assisting Dr. Muller on a routine cleaning, he accidently cuts a patient’s gum with his dental instrument. He stopped the bleeding and notified Dr. Muller of the cut, but no further action was taken. Four months later, Steven received notice of a lawsuit demanding $5,000 for an infection that caused the patient to lose his tooth. Because Steven was an independent contractor not covered under Dr. Muller’s dental malpractice insurance, he soon found himself in severe debt trying to pay for lawyer fees and unpaid leave from work.

*Marriage Counselor: Neil and Kimberly sought the assistance of Paul Lawson, a relationship/divorce therapist, in order to save their marriage. With two successful businesses they co-own and run, they financially had a lot at stake. Utilizing a combination of individual and joint sessions with the counselor, they proceeded with weekly sessions for a year. After a few months, Neil began to suspect that Mr. Lawson was manipulating Kimberly’s individual sessions to expedite the divorce process rather than to resolve their differences. He was furious when Kimberly served him with divorce papers, including a demand for sole ownership of the two businesses. Neil blamed Mr. Lawson for swaying Kimberly’s decision and filed a lawsuit against him.

In many cases these plaintiff actions are defensible and the business or individual can prove they were not negligent. This requires legal defense, an important coverage component of a professional liability policy. The marriage counselor cited above might be innocent of the allegation, but, without a professional liability policy, he will have to pay the legal defense costs out of his own pocket at $200 to $500 per hour, or more, depending on the law firm, jurisdiction, and potential financial severity and impact of the situation.

Mistakes, and alleged mistakes, like “stuff,” happen. Because they do it is prudent to consider and review the benefits of professional liability coverage for the health and welfare of your business.

*Claims examples cited above courtesy of United States Liability Ins Group, publication AH CE 4/10.

Mark Tarpinian has been an insurance agent in the Detroit area for 29 years, and is President of TFI Insurance & Benefits, a trenchantly independent insurance agency in beautiful downtown Northville. He can be contacted at mark.t@tfiins.com