Consultants "by necessity" need professional liability coverage

The professional liability policy may be worded as follows:

The Company will pay on behalf of the Insured any loss excess of the deductible not exceeding the limit of liability to which this coverage applies that the Insured becomes legally obligated to pay because of claims made against the Insured during the policy period for wrongful acts of an Insured or because of personal injury arising out of wrongful acts of an Insured."
In addition, it excludes "coverage for allegations of bodily injury, sickness, disease, or death of any person, or damage to or destruction of any tangible property, including the loss of use….

This wording shows the limited scope of the professional liability policy. The intent of the professional liability policy is to cover only negligent professional acts and personal injury to a third party committed by the insured.

Read AA&B's December feature "Changing legal landscape increases risk."

What does the CGL cover?

The CGL is designed to cover bodily injury to a person or damage to the property of others caused by a firm's negligence. As courts have ruled repeatedly, the CGL policy is not a performance bond. A CGL policy is not intended to cover the quality of a company's advice or services. This inhibits the insured from low bidding a job and performing poorly, relying on the insurance carrier to pick up that risk.

Look first at CGL policy language under the insuring agreement, the heart of the policy. "We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of "bodily injury" or "property damage" to which this insurance applies."

Although there is a great deal of uniformity between professional liability or commercial general liability forms, no one single form is used across all carriers.

In addition to bodily injury and property damage, the CGL covers personal injury liability, including libel and slander, as well as advertising injury. The CGL offers consultancies broad coverage and peace of mind. They can run their business knowing that help is available in the event of a broad range of losses.

Here are a few of the exposures covered under the CGL:

• Additional insured coverage when the insured agrees by written contract or agreement
• Premises and operations liability for persons injured or items damaged while on your insured's premises or because of the consultancy's business operations
• Tenant's liability in the event the business does damage, for example accidentally starts a fire in rented premises
• Liquor liability if the insured is not in the liquor business
• Defense for covered claims
• Pays bonds and court courts associated with a claim
• Offers limited financial remuneration when assisting the carrier in the defense of a claim.

What are some CGL exclusions?

There are many exclusions under the CGL, but to understand each one is tricky. Forms differ and jurisdictions that hear lawsuits vary greatly. However, here are some general exclusions:

• Intentional injury is excluded. When an insured acts in self defense, there is generally coverage. For example, suppose a robber breaks into the darkened firm and brandishes a knife at the owner, who is taking a catnap. Your insured heaves a computer monitor at the burglar and the burglar is injured. Carriers should defend the case unless it appears the insured intended to inflict malicious injury.
• Care, custody and control of property owned by others. For the consultancy that repairs computers, bailee coverage may be necessary.
• Faulty workmanship is excluded.
• Liability arising from an aircraft, auto or watercraft is excluded. However, entrusting an automobile to a negligent employee may trigger coverage, depending on the form and the jurisdiction.

While the CGL policy offers the majority of consultancies broad coverage, agents must evaluate each risk carefully to ensure the CGL adequately protects the consultancy's unique exposures.

The CGL may still lack scope

As your client's consultancy grows, the CGL is only part of your insured's coverage solution. The CGL will not cover every exposure your insured faces, especially once he or she hires employees.

In most states, after a small number of employees are hired, workers' compensation coverage is mandatory. In addition, employment practices coverage is important in today's complicated employment arena because coverage under the CGL is limited. A consultancy may start with only one computer and a printer, but as the firm grows, so does its personal property. This should be insured as well.

For many firms with even the most trusted employees, crime policies are vital. For example, suppose your insured takes in a computer for repair. During the repair, a new employee works on the computer. Unknown to the insured, the new employee has severe financial difficulties. While working on the computer, the employee copies the customer's passwords from the hard drive and steals money from the customer's bank accounts. The computer owner sues your insured not only for the financial losses incurred, but also for the time from work the victim loses while resolving the identity theft. Crime coverage is designed to defend and pay these losses.

One easy approach to coverage

Clearly, the CGL offers broad coverage and peace of mind for any consulting firm. Because most consultants have auto insurance, to some extent they understand liability coverage. The CGL is more complicated, but the general principles of coverage for bodily injury and property damage are similar to the auto policy. For the new consultant, this comparison may be a good starting point to help explain a company's need for general liability coverage.

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