Defining Profession In Professional Liability

In some instances the services they tout may rise to the level of professions; in others, they may not.

Unlike a companys traditional exposure for bodily injury and property damage losses, the firm that begins to dabble in professional services may encounter the need to pay purely economic damages because the service they offered just wasnt up to the standard the client expected from a "professional."

But what makes a professional?

Courts typically have held that five elements are required before an individual is considered to be a professional:

Extensive learning and training, often including a degree or professional designation.

A code of ethics that is higher than that seen in general occupations.

An emphasis within the occupation of a high level of responsibility that often is supported by a law or regulation.

Governmental licensing.

A system to discipline those who break professional standards or fail to adhere to licensing requirements.

During a recent seminar, Fran OConnell, an underwriter with Shand Morahan & Co. Inc., which specializes in professional liability insurance, said that professionals have special skills and experience, are held to a higher standard of care than nonprofessionals, and perform services for others for a fee.

Although these two definitions differ somewhat, its fair to say that a professional is a person who is well trained, often possesses a professional license and provides a service to another for a fee.

And the "provides a service to another for a fee" is critical when assessing the risk of professional exposures. A staff accountant who provides accounting services solely for her employer does not constitute a professional risk for her employer because shes restricted to her companys business.

If her employer decides to offer accounting services to other companies, however, the risk for professional liability damages develops. This professional not only offers a specialized service to others for a fee, but also runs the risk of causing a customer to incur a purely financial loss.

For insurance purposes, these types of professionals may be insured through a miscellaneous professional liability coverage form, which often is used in particular to cover the economic damages that a company owes as a result of performing a nonmedical professional service. Instead of the insurance addressing a specific type of professional liabilitysuch as medical or legal malpracticethe form is written to apply to the profession that is specified in the policy.

From a risk management perspective, there are two big differences that should be considered in the context of nonmedical professional exposures. A professional is held to a higher standard than a nonprofessional and, as a result, it may be easier for a claimant to recover financially from a professional than from a nonprofessional.

For example, a general contractor may contractually agree to construct a structurally sound building for a client. If the contractor doesnt meet contract requirements, he may be held liable for a breach of contract, and damages likely would be limited by the contract.

This breach of contract and purely financial damages are not considered traditionally insurable risks.

The standard for judging his negligence in the situation would be the reasonable person rule: the contractor must exercise the standard of care that a "reasonable" person would exercise in similar circumstances.

On the other hand, an individual considered a professional is held to a higher standard of care. She must operate at the level of other professionals in her field.

For example, the real estate professional who manages a commercial building may fail to keep the building in good physical shape. As a result, tenants leave and rental rates are below average. Although no one is physically harmed, the property manager may be responsible for the financial loss the building owner incurs because of the poor rentals.

A property manager considered a professional may be held by the court to a higher standard than that of the "reasonable person." As a result, the building owner will find it easier to recover economic damages.

Professional liability insurance is one way to finance that economic exposure. It responds to purely economic damages, which are excluded on general liability coverage.

The danger is that a miscellaneous professional exposure easily may develop from a nonprofessional activity without anyone realizing the potential for damages.

So, the construction firm that expands into building management or the company that begins to offer accounting services for other firms may open themselves up to not only greater potential to cause economic loss, but also a legal yardstick that will require a professional standard of performance.

This is not to say that the only way to handle an emerging professional liability exposure is through insurance. But it does point out the need to at least be aware of the risks involved and protect the corporation from the results of the exposure.

The higher standard of care and the potential for purely economic damages may add up to serious financial consequences for a company that begins to offer even quasi-professional services to others.

Diana Reitz is editor of the National Underwriter Company publication "The Tools & Techniques of Risk Management & Insurance" as well as the "Risk Funding" & "Self-Insurance" Bulletins, both available at www.nationalunderwriter.com/nucatalog

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.