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14.2 Specialty and Professional Liability Insurance

Some businesses and professionals face specialized liability exposures that are excluded or not covered by standard commercial liability policies, creating coverage gaps. Specialty liability insurance is designed to protect against these unique risks and is written on nonstandard forms with provisions tailored to the insured's specific exposures. Two major categories of specialty insurance are Professional Liability insurance and Management Liability insurance.

Professional Liability insurance protects professionals against claims arising from their professional services or conduct. It covers economic (financial) and consequential losses for which the professional may be legally liable. Because these professionals are held to a higher standard of care due to their specialized expertise, they face unique liability exposures. Common Professional Liability policies include Errors and Omissions (E&O) and Medical Malpractice insurance for professionals such as physicians, lawyers, architects, engineers, contractors, brokers, real estate agents, and insurance agents.

Management Liability insurance protects officers, directors, and managers against claims arising from their fiduciary responsibilities and other leadership duties. These individuals are expected to act with loyalty, reasonable care, and obedience to applicable laws while managing the organization. Claims involving corporate fraud, insider trading, securities law violations, breach of fiduciary duty, or disclosure of trade secrets can create significant liability. These exposures are commonly insured under a Directors and Officers (D&O) Liability policy.

The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum standards for employer-sponsored retirement and health benefit plans. Fiduciaries may be held liable for breaches of their ERISA fiduciary duties. Because this exposure is often excluded under other liability policies, it is typically covered by a Fiduciary Liability policy.

Common Specialty Insurance Characteristics​

Common Perils/Exposures​

Specialty liability policies may provide coverage for a variety of unique exposures, including:

  • Fraud or breach of contract
  • Conflicts of interest
  • Malpractice or professional negligence
  • Government investigations
  • Errors and omissions (E&O)
  • Cyber risks, including:
    • Business-to-Business (B2B) exposures
    • Business-to-Consumer (B2C) exposures
    • Internet Service Provider (ISP), mobile, and cellular exposures
    • Internal technology infrastructure exposures
    • Corporate website exposures

Excluded Exposures​

Specialty liability policies exclude losses that are covered by other insurance policies. Depending on the policy, common exclusions include:

  • Bodily injury and property damage
  • Personal injury
  • Work-related injuries
  • Liability arising from motor vehicles, aircraft, or watercraft
  • ERISA responsibilities
  • Employment Practices Liability (EPL)

Some exposures are uninsurable or within the insured's control, such as intentional acts and prior acts, and are therefore excluded. Other exclusions are specific to the profession being insured. For example, an Errors and Omissions (E&O) policy for an insurance agent or broker may exclude claims arising from professional services that required a license if the license was not obtained or not valid when the services were performed.

Who Is An Insured​

As with a Commercial General Liability (CGL) policy, the insureds are those listed in the Declarations and may also include:

  • Executive officers and directors
  • Stockholders and trustees
  • Volunteer workers and employees

Duty to Defend​

Unlike a Commercial General Liability (CGL) policy, a Professional Liability policy does not typically include a duty to defend. Instead, many policies require the insurer to pay defense costs for covered claims while allowing the insured greater control over the defense and settlement of those claims. Because defense provisions vary, insureds should carefully review their policy to understand the coverage provided.

Shrinking Limits Defense Provision (Defense Within Limits Provision)​

Many Professional Liability policies provide defense costs within the limits of insurance, meaning defense expenses reduce the policy limits available to pay claims. This differs from a Commercial General Liability (CGL) policy, which pays defense costs in addition to the policy limits.

Many Specialty Liability policies require the insurer to obtain the insured's consent before settling a claim. If the insured refuses a recommended settlement, the insured may become responsible for any additional defense costs or increased damages that result from the refusal.

Policy Triggers​

Professional Liability policies are typically written on a Claims-Made or Claims-Made and Reported basis. Unlike an Occurrence policy, coverage is not determined by when the event occurred. Instead, coverage depends on when a claim is made against the insured and, if required by the policy, when the claim is reported to the insurer.

Under a Claims-Made policy, the claim must be first made during the policy period. The claim may be reported after the policy period, but it generally must be reported immediately or as soon as practicable after it is made.

Under a Claims-Made and Reported policy, the claim must be both made and reported during the policy period.

Types of Professional Liability Insurance​

Errors and Omissions (E&O) Insurance​

Errors and Omissions (E&O) insurance protects professionals whose negligent acts, errors, or omissions in providing professional services may cause financial loss to a third party. Common insured professions include insurance agents, adjusters, real estate agents, architects, accountants, attorneys, surveyors, and appraisers. Covered claims may include negligence, clerical errors, failure to provide material information, and misrepresentation of a product or service.

Insurance agents have a duty to evaluate their clients' insurance needs and recommend appropriate coverage. If an agent's negligence, error, or omission results in inadequate coverage or leaves a client uninsured, the agent may be legally liable for the resulting loss.

Errors and Omissions (E&O) insurance is commonly written with a minimum $1 million limit of liability, which may include defense costs within the policy limit. Coverage generally excludes fraud, criminal acts, and the misuse of client funds.

Medical Malpractice Insurance​

Medical Malpractice insurance protects healthcare professionals whose negligent acts or omissions may cause injury to patients. Common insureds include physicians, surgeons, nurses, dentists, as well as professionals such as social workers and beauticians. Unlike most other Professional Liability policies, Medical Malpractice insurance may cover bodily injury. For example, a Physicians, Surgeons, and Dentists (PS&D) Liability policy covers the insured's legal liability arising from a medical incident, meaning the rendering of medical or dental services by the insured, the insured's employees, or individuals acting under the insured's supervision.

Types of Management Liability Insurance​

Directors and Officers Liability (D&O) Insurance​

Directors and Officers (D&O) Liability insurance protects the directors and officers of a corporation or other legal entity against claims arising from wrongful acts committed while acting in their official capacities. These claims may result in liability for the organization, the individual directors and officers, or both.

A Directors and Officers (D&O) Liability policy offers three standard Insuring Agreements:

  • A-Side Coverage: Provides direct coverage to directors and officers for claims arising from wrongful acts committed in their official capacities.
  • B-Side Coverage: Reimburses the company for amounts it pays to indemnify directors and officers for covered claims. It does not cover the company's own liability.
  • C-Side Coverage: Covers losses sustained by the company itself, regardless of whether its directors or officers also suffer a loss.

Fiduciary Liability Insurance​

Fiduciary Liability insurance provides Errors and Omissions (E&O) coverage for businesses in the administration of employee benefit plans, such as pension, profit-sharing, and medical insurance plans. Because ERISA expanded the legal responsibilities of fiduciaries, it also increased businesses' exposure to fiduciary liability claims.

Employment Practices Liability Insurance (EPLI)​

Employment Practices Liability Insurance (EPLI) protects employers against claims by current, former, or prospective employees alleging violations of their legal rights. Covered wrongful acts may include:

  • Wrongful termination, demotion, failure to promote, or refusal to hire
  • Harassment, including sexual harassment
  • Discrimination based on race, age, gender, disability, religion, or other protected characteristics
  • Defamation
  • Invasion of privacy, mental anguish, or emotional distress
  • Retaliation for reporting unlawful or unfair employment practices
  • Wage and hour law violations
  • Breach of an employment contract

Employment Practices Liability Insurance (EPLI) generally excludes:

  • Prior acts
  • Pending litigation
  • Injuries covered by Workers' Compensation or Employers Liability insurance
  • Punitive damages
  • Civil or criminal fines assessed against the insured

Some insurers may offer coverage for punitive damages or certain other excluded exposures by endorsement or as optional coverage.

Liquor Liability Insurance​

Liquor Liability insurance, also known as Dram Shop Liability insurance, protects businesses that sell, serve, distribute, manufacture, or furnish alcoholic beverages against liability arising from dram shop laws. These laws may hold a business liable if it contributes to a person's intoxication and that person causes bodily injury or property damage. Common claims include injuries resulting from assault and battery by an intoxicated customer or drunk-driving accidents.

Liquor Liability insurance excludes expected or intended injuries, except for bodily injury resulting from the use of reasonable force to protect people or property. Coverage is also excluded if alcoholic beverages are sold, served, or furnished while a required liquor license is not in effect.

Cyber Liability Coverages​

As businesses become increasingly dependent on computers, websites, email, and other technology, the need for cyber insurance continues to grow. Although cyber policies vary among insurers, they commonly provide coverage for cyber liability, data breaches, cybersecurity incidents, and the restoration of damaged or lost data.

Internet Liability and Network Protection Policy​

The Internet Liability and Network Protection policy is written on a claims-made basis and provides coverage for internet- and network-related risks through five Insuring Agreements:

  • Insuring Agreement A – Website Publishing Liability: Covers liability for wrongful acts arising from internet publishing, including copyright infringement, defamation, misleading statements, and privacy violations.
  • Insuring Agreement B – Network Security: Covers liability resulting from a network security breach, including unauthorized access, disclosure of customers' personal information, or transmission of a virus to a third party.
  • Insuring Agreement C – Replacement or Restoration of Electronic Data: Covers the cost to replace or restore electronic data lost or damaged by a virus or other malware.
  • Insuring Agreement D – Cyber Extortion: Covers losses from cyber extortion threats, including ransom payments and related expenses, such as the cost of hiring a security firm to evaluate the threat.
  • Insuring Agreement E – Business Income and Extra Expense: Covers business income losses and extra expenses resulting from a cyberattack or cyber extortion event that interrupts business operations.

Insuring Agreements A and B include coverage for defense costs, with those costs included within the policy limit rather than paid in addition to it.

Commercial Cyber Insurance Policy Developments​

The Commercial Cyber Insurance policy expands on these foundational Insuring Agreements by providing more specific cyber coverages. For example, Cyber Extortion coverage protects against losses resulting from threats involving hacker attacks, malicious code, viruses, ransomware, and the unauthorized access or disruption of computer systems.

Network Security coverage is expanded into two separate Insuring Agreements:

  • Security Breach Expenses: Covers the costs to investigate, respond to, and recover from the unauthorized acquisition of customers' personal information.
  • Security Breach Liability: Covers damages the insured is legally obligated to pay, as well as defense expenses, resulting from an actual or alleged breach of duty, neglect, or omission that causes a security breach or the transmission of a computer virus.

The Commercial Cyber Insurance policy also covers public relations expenses incurred to help restore the insured's reputation following negative publicity resulting from a covered cyber incident.