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Risk Management Insuring professional acts Professional liability and errors and omissions coverages are not synonymous By Donald S. Malecki, CPCU Determining whether or not some form of professional liability insurance is necessary can be difficult because—apart from the usual professions requiring it—a person does not have to be a professional to be considered as acting in that capacity. Thus, it is not the person’s title that is the criterion. It is the nature of the person’s act or conduct that is the decisive factor. It is, therefore, the act or conduct that must be analyzed to determine if the complaint of damages can be said to have arisen from the rendering or failure to render professional services. What complicates matters is that the conclusion of whether or not the conduct is professional occurs after the act or failure to act has caused injury or damage to some third party. Also, when litigation arises, whether coverage applies is a question of law for the court to decide and sometimes that is like playing roulette! Meeting the test Legal and non-legal literature, including court decisions dealing with the meaning of “professional act” commonly define it to mean one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill, and with the labor or skill being predominately mental or intellectual, as opposed to physical or manual. It is relatively easy, therefore, to categorize anyone employed in the medical, veterinarian, ophthalmology, legal or architectural/engineering fields as professionals. However, what creates a burden in determining with any specificity if the person is or has acted as a professional is that one must not look to the title or character of the person performing the act, but to the act itself. Undoubtedly one of the more notorious examples of this rule is an actual case some years ago involving a hospital “candy striper,” i.e., a young female who acted as a volunteer aid to primarily nurses. In the presence of a surgeon, she inserted a needle into a patient and caused serious injury. She was held to have acted in a professional capacity. What all of this means is that, apart from known categories of professionals, it may sometimes be impossible to determine whether professional liability insurance is necessary. It should not be overlooked, too, that some tasks performed by a professional that are ordinary activities achievable by those lacking the relevant professional training and expertise, might be the subject of commercial general liability insurance, or errors and omissions, rather than a professional policy. A case in point is Medical Records Associates, Inc. v. American Empire Surplus Lines Insurance Company, 142 F.3d 512, (U.S. Ct. App. 1998.) The named insured (MRA) was a medical records processing business. It contracted with hospitals and medical centers to carry out the statutory obligations of providing patients and their attorneys with copies of patients’ medical records upon request. MRA was sued by a number of persons alleging that it had overcharged for copies and may have also included improper charges on its bills in violation of state statutes. When MRA sought coverage from its insurer under its E&O liability coverage, it was denied for several reasons, including the fact that what acts were alleged were not considered professional acts. As a result, MRA settled the matter and then filed suit against its insurer. The court concluded that the claim fell outside the coverage provided by the insurer’s policy because the alleged over-billing was not part of MRA’s professional services as a medical records processing company. The court viewed “billing” as a ministerial act or a “routine aftereffect” associated with, but not part of, the professional service performed by MRA. The court therefore granted the insurer’s motion to dismiss. The named insured’s appeal was affirmed against it. If a commercial general liability policy had been purchased, the fact that this alleged act was held not to be professional would not have mattered, regardless of whether a professional services exclusion applied. The reason is that commercial general liability insurance does not cover economic damages based on fault. It instead covers damages because of injury or property damage. What MRA should have been sold here was not a professional liability policy but an errors and omissions liability policy. The difference is very important. The errors and omissions policy generally is required by anyone who is not a professional and who requires coverage for economic damages based on his or her acts, errors or omissions. The mistake here was for the medical records company to purchase an E&O policy making coverage contingent on the rendering or failure to render professional services when its ordinary business conduct did not require the administration of professional conduct. E&O policies are available without making coverage contingent on professional conduct. A major obstacle here is that the insurance business has so intertwined professional and errors and omissions liability that they are often referred to as being synonymous when, in fact, they are not. Take, for example, the standard ISO endorsement that applies to those in the business of selling, franchising, or licensing of computer software, including electronic data processing programs, designs and specifications. It is titled “Professional Liability Exclusion—Computer Software.” What is it about persons in this occupation that makes them professional? This particular endorsement specifically excludes injury or property damage arising out of the rendering of or failure to render professional services. On the other hand, “Professional Liability Exclusion—Electronic Data Processing” endorsement does not specifically address professional services within its provisions. Instead, this endorsement excludes any act, error or omission with respect to data processing services. Technically, neither endorsement should contain any reference to “professional” in its title or contents. Both should be categorized as E&O endorsements, particularly since it is doubtful that any insurer will issue a professional liability policy for either one of those job descriptions. Unpredictable conclusion The nursing home in the case of American Economy Insurance Co. v. Jackson, 476 F.3d 620, (U.S. Ct. App. 8th Cir. 2007) fortunately had a professional liability policy with a $1 million limit but looked to its businessowners policy for additional coverage. The obstacle was a profes-sional services exclusion and the question was over whether what had happened was a professional service. Briefly, during a heat wave in 2001, three patients at a skilled nursing facility in Missouri died as a result of excessive heat. The facility’s administrator, who formerly worked as a registered nurse and director of nursing, was in charge of deciding whether or not to switch the HVAC system from heat to air conditioning. As a result of this indecision and the deaths, a suit for wrongful death was filed against the facility and others. One would think that since a professional act or service is one that arises out of a vocation, calling, or employment involving specialized labor and skill, the indecision of the administrator would not fall into that category. Anyone with less skill could have the obligation to turn up the heat or cool down the facility. But in this case, the court reasoned that the decision to refrain from switching the HVAC system to air conditioning for the medical benefit of residents rested on the administrator’s training and experience as a nurse, director of nursing and nursing home administrator—all of which require specialized knowledge and skill. The court also stated that, while it was doubtful that the professional services exclusion could be read so broadly as to include any act occurring within the nursing home, the acts in question fell within that exclusion because the administrator drew upon her knowledge and experience as a nurse and administrator when she made the decisions that led to the deaths. The decisive factor, according to the court, was that while the failure to engage the HVAC system’s air conditioning could be considered a ministerial or administrative act, the facts reveal that the administrator considered the various medical conditions of the residents before she exercised professional judgment and determined that the HVAC system would not be activated. Conclusion Apart from recommending professional liability insurance to professionals and professional organizations, there is not much producers can do to single out those who also might need such insurance. Whether or not a given act that has created damages is a ministerial or professional one is anyone’s guess, and selling appropriate insurance to fill needs is not a guessing game. What producers can do, however, is to understand the important distinction between errors and omissions and professional liability insurance. Once producers get a handle on the differences, they may be in a better position to make sure that the appropriate policy is issued. In other words, if an E&O liability policy is necessary to cover the economic damages brought by mistakes in judgment, make sure the policy does not make coverage contingent on professional conduct. This is no easy task because the insurance industry has long confused both E&O and professional liability. The courts, too, are just as guilty. In fact, the court in the aforementioned Medical Records Association case stated “[a] professional errors and omissions policy provides limited coverage.…” The legal text, J. Appleman, 7A Insurance Law and Practice, Sec. 4504.01 at 310 (1979) states, “An errors-and-omissions policy is a professional liability insurance providing a specialized and limited type of coverage as compared to comprehensive insurance …” These types of misleading characterizations of professional and errors and omissions coverages need to be ignored. It would make good risk management sense for producers to focus on understanding the differences between professional and error and omissions coverages and when both apply. * |
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