We live in an exciting time of business innovation and entrepreneurship where it seems like every day a new professional service emerges, claiming to make our work or personal lives better.
Non-tangible services offered by professionals – hair stylists, car mechanics, massage therapists, interior designers, etc. – have become so pervasive in our everyday lives that, depending on the relationship, it can be easy for consumers to forget these practitioners are operating professional businesses with inherent risk exposures and liability concerns.
But that’s exactly what they are – businesses in need of insurance. And as savvy providers increasingly offer specific and specialized services, they are recognizing the limits of their liability insurance and seeking bespoke professional liability policies that cover their unique risk exposures.
What they might be finding instead, however, are miscellaneous professional liability (MPL) policies that fail to provide an effective professional services definition—potentially rendering the policy worthless in a claim of professional negligence.
In this article, we will examine the complexities of MPL policies and placements and how we can help our insureds obtain better coverages by understanding your specific risk exposures.
Understanding Professional Liability
Before we can discuss the complexities of MPL insurance, it’s important to first define the purpose of professional liability insurance.
Professional liability insurance, also known as errors and omissions (E&O) insurance, protects professionals if they are sued for negligence when providing services to a third party for a fee.
Let’s break that definition down by its base components:
1. Professional services: Work that requires specialized certification, education, skill, or license.
2. Third parties: People or entities other than the insured themselves or their own companies/subsidiaries.
3. Fee: Contracted payment, or simple financial transaction such as cash or check. This is important because the cost of services is typically a basis for losses claimed in a lawsuit.
4. Negligence: A “reasonable standard of care” (whether someone acts with care as an average reasonable person would under those circumstances) is applied at a higher level for professionals. For example, engineers are evaluated based on the professional standards (education, skill, training, licensing) of their field.
A project owner hires a structural engineer to determine the steel needed for a mixed-use project. The engineer mistakenly uses the incorrect code for the project, resulting in higher structural steel costs. The owner incurs $5 million in additional costs due to the alleged negligence of the structural engineer, so the owner sues the engineer for the additional costs.
The reasonable standard of care applied to the engineer means he should have known and used the correct code for the project. Thus, his error is considered professional negligence, and the claim is paid by the engineer’s professional liability policy.
This is a simplified example of how traditional professional liability policies are typically applied to claims. The application is straightforward because these policies are written on existing specialty forms designed for specific professionals—architects, accountants, lawyers, insurance agents, etc.—where the professional services definitions, policy language, and contract terms account for known risk exposures in those professions. And there is an established precedent for how the policies have historically been applied.
But what about newly emerging professions where there aren’t known risk exposures or precedents to guide policy language? Enter the increasing trend toward tailored MPL policies.
Complexities of MPL Policies
As the term “miscellaneous” implies, MPL is a more generalized type of E&O coverage for service professionals—business consultants, interior designers, travel agents, realtors, etc.—who don’t fall into a traditional, specified professional category with a designated policy form.
Instead, for MPL policies, a broad-form E&O policy is often used as the base policy language with endorsements added for professional exposures associated with industry groups, such as real estate agents.
You might think that the flexible nature of these forms makes them easy to adapt and use, but it can instead make service definitions more difficult to craft and place the risk more challenging.
Generally, MPL policies include broad definitions of covered services—sometimes as broad as “any services provided to others for a fee or consideration” or “services as listed on the insured’s website.” This broad language leaves much to interpretation, but also can provide a comfortable “blanket” of covered activities. That said, carriers often tailor the definition of covered services with a line item on the declarations page, a specific endorsement, and/or exclusions.
If the covered professional services definition is not accurate, or too broad (or conversely, too limited), then the policy can’t be triggered, rendering any other coverages contained in the policy useless. Similarly, some of the industry-specific endorsements typically added to policies can contain exclusions that are applicable to the entire policy. Therefore, careful examination of endorsement language is required to avoid coverage issues.
Carrier Appetite, Form Limitations, and Pricing
Placement of MPL risks can also be challenging for agents and brokers due to carrier appetites that vary widely and are constantly evolving, as well as rating calculations that favor traditional, established professional services.
Some carriers have books that heavily favor specified professions, while others are engineered to respond with unique solutions for MPL. Blended service offerings can be particularly difficult to place because many carriers who write specific professions have guidelines that prevent them from offering complete MPL solutions alongside more traditional E&O offerings.
Adding to the complexity are pricing models that not only consider the nature of the services provided and the types of projects or industries served, but also the experience level of the professionals, the company’s previous annual revenues (which represent the scope of the services provided), and claims loss history—data that might not exist yet for new or emerging professional service providers.
The lack of industry standards around MPL policies highlights the important role educated agents and brokers play in helping insureds understand their risks and choose the best coverage options.
As the landscape for professional liability insurance continues to evolve, so will the complexities in finding bespoke policies that meet the needs of emerging professionals.
Views expressed here do not constitute legal advice. This article was originally published by amwins and posted here with a few minor changes and spelling/punctuation corrections. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has a different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.