It's hard to define professional liability
Courts, insurers offer little clarity on who and what is covered
By Donald S. Malecki, CPCU
Not so long ago, producers could easily identify the individuals whose education and training marked them as professionals: physicians and other health care providers; architects and engineers; lawyers and accountants. Professional liability coverage tailored to the needs of individuals in these classes is readily available in the standard market as well as from excess-surplus and specialty carriers.
In recent years, however, it has become increasingly difficult for producers to ascertain who is a professional for insurance purposes. Ambiguous or inconsistent policy provisions, coupled with conflicting court decisions, have significantly muddied the waters. Today, the definition of "professional" extends well beyond the traditional disciplines mentioned above.
In fact, one need not be a professional to perform a professional task. In a number of cases, courts have stated that, in order to determine the scope of a "professional services" exclusion in an insurance policy, it is necessary to look to the nature of the insured's act or omission. The reason is that not all acts of professionals are considered to be professional services.
This creates a serious challenge for producers who offer professional liability insurance. It might be reasonable to conclude that almost everyone should have professional liability coverage because there is no telling when a person might do or fail to do something that could be construed as a breach of professional conduct.
Further complicating matters, some insurers have denied liability claims against professionals on the ground that the alleged act was not a covered professional service.
In some cases an individual who does not have a professional liability policy may maintain that his or her conduct was not professional so as to obtain coverage under an existing general liability policy. In such cases, the insurer may deny coverage on the ground that the insured's conduct was professional.
Cases in point
The confusion over what is and what is not covered professional conduct is illustrated in the following cases.
In Medical Records Associates, Inc. v. American Empire Surplus Lines Ins. Co., 142 F.3d 512 (U.S. Ct. Ap. 1st Cir. 1998), the medical records processing company was sued for overbilling for copies of documents and sought coverage under its professional liability policy. The court held that setting fees for copies of medical records was not a professional service, thus barring coverage.
Because the CGL policy applies only to bodily injury, property damage, personal injury and advertising injury, that policy also would not have covered the claim against the medical records company. Further, it is difficult to see how a producer could have been held liable if an E&O claim were made. Let's face it: Not every act is insurable.
In Atlantic Lloyd's Ins. Co. of Texas v. Susman Godfrey, LLP, 982 S.W.2d 472 (TX App. 1998), a lawyer's solicitation letter to a potential client was held not to be a professional service, even though the solicitation process was governed by professional disciplinary rules. The court held that soliciting work required no specialized legal knowledge or training.
As in the medical records case, the lawyer's action was covered by neither professional liability insurance nor a CGL policy.
In some cases, an errors and omissions policy might provide coverage for acts of professionals that are not deemed to be within the scope of professional services, as in the two cases cited above. This column featured an article in the July 2007 issue that compared and contrasted the features of a professional liability policy and an E&O policy.
State of confusion
Insurers are not of much help in alleviating the confusion over professional liability coverage. For example, some insurers exclude certain disciplines as professionals and others as nonprofessionals without any clear reason for doing so. What criteria do insurers use to determine that some acts are "professional" and others constitute "errors or omissions"?
Examples are ISO endorsement CG 22 99, Professional Liability Website Designers, and endorsement CG 22 98, Internet Providers and Internet Access Providers Errors or Omissions. With respect to the first endorsement, why is the word "professional" used in the title but not mentioned in the text of the endorsement itself?
What qualifies this endorsement as a professional liability exclusion in the first place, given that no special education or training is required to create Web sites? In fact, people of all ages and backgrounds can and do design Web sites. Perhaps the endorsement is called a professional liability exclusion because, as mentioned earlier, it is the act and not the actor that is important. But is this kind of work considered professional? If the words "professional liability" were dropped, could the endorsement still serve the same purpose?
The problem with endorsement CG 22 98 is that it appears to be unnecessary. It should not exclude injury or damage, simply because no one will be able to obtain an E&O policy that covers injury or damage. If neither injury nor damage is excluded, this exclusion would be unnecessary because no policy—in this case the CGL—can exclude coverage that was not provided in the first place.
What about funeral directors? Are they professionals? According to ISO endorsement CG 21 57, they are not professionals. Why, then, does a funeral director need a professional liability policy?
Here is something else to think about. If the standard of care is negligence, is coverage for a professional's negligent acts, errors or omissions sufficient? In the case of Town Crier, Inc. v. Hume, 721 F. Supp. 99 (1989), involving a real estate brokerage firm, coverage that was limited to negligent acts, errors or omissions was held not to cover intentional acts.
Further, why do some endorsements exclude any negligent act, error or omission and others simply exclude errors and omissions, and still others exclude any act or omission? Considering that a CGL policy covers any act (intentional or unintentional), an endorsement excluding negligent acts would leave intact coverage for intentional acts. Is this what insurers intend?
The current status of professional liability insurance—who needs it, what it should and should not cover, and how endorsements can be structured to avoid gaps—is, simply put, a big mess. It is surprising that there have not been more problems because there are plenty of ambiguities to go around for everyone.
If what some courts are saying is true—that one must look not to the person but instead to the act of the person to determine whether it is professional conduct, the CGL policy technically should exclude professional services. That, however, is not going to happen.
Realistically, insurers need to determine why the CGL policy should not apply to certain disciplines, and the endorsements should be consistent about what is excluded. A lot of work is needed here.
In the meantime, as noted earlier, it is hard to understand how producers could be faulted for failing to obtain professional liability or E&O coverage that corresponds to the exclusions in the CGL policy. Right now, the best course for producers is to offer professional liability insurance to those who appear to be professionals and not try to guess what non-professionals might also need insurance.
Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.