Professional Liability Insurance Coverage

The Facts: A manufacturer retained a management consultant to evaluate operational efficiencies and provide recommendations to streamline production and reduce staffing costs. The consultant recommended a restructuring plan, which introduced a new staffing model and supply chain management process.

Risk Factors:The capabilities of several of the manufacturer’s key suppliers changed after the plan was drafted. The consultant provided revised recommendations to the client, which the client ignored, causing delays. It took 18 months to fully implement the plan, during which several key employees resigned due to frustration with the process.

The client sued the consultant, alleging that the consultant had not fully investigated the supply chain issues and had used unrealistic assumptions in the plan, leading to $150,000 in additional costs to get new suppliers in place and $350,000 in lost profits due to the inability to meet customer demand during the transition. The investigation revealed that the revised recommendations provided to the client was not communicated in writing, and written reporting during the implementation phase was insufficient to fully defend the consultant in this matter.

A male security officer hit a local security company with a lawsuit claiming sexual harassment. The claimant alleged that a male manager would regularly and repeatedly sexually harass him by touching him on the chest and stomach while stating different sexual phrases to him. He further alleged that his employer failed to investigate or take any corrective action concerning his allegations. The employer did in fact investigate the claim, and the manager was eventually terminated. In some states, strict liability can apply to certain situations such as this, meaning the employer is liable for the actions of its managers, even if no one was aware that improper behavior was taking place. This matter cost the security company $400,000 to resolve.

A medical assistant who misplaced a lab report and failed to show the lab results to the doctor (her boss and husband) delivered "professional services" even though the acts were merely clerical.

Most professional services involve clerical duties that may lead to liability. Even if a secretary or assistant performs the duty, the professional is ultimately responsible.

An interior designer designs the lighting fixtures himself for the 450 guest rooms at a hotel. When they are completed, he discovers that due to a communication error, the fixtures, which were produced overseas, do not meet UL standards. All 450 fixtures must be replaced. The foreign manufacturer claims that the designer did not communicate this requirement, so they′re not responsible.

Under which policy is this claim covered?

Our answer is that the design of products is excluded under professional liability insurance. Product liability IS covered under general liability insurance, but with restrictions. In this case, it’s the professional liability coverage that would provide the defense since the interior designer selected a manufacturer that did not meet UL standards. Professional liability insurance would not indemnify for the defective product, but would defend and potentially indemnify for the failure to select an appropriate manufacturer who was familiar with UL standards.

Legal Opinion

A development company working with a vacation resort asked its associate general counsel for advice regarding development of an adjoining property. The development company relied on the associated general counsel’s written legal opinion about the costs involved in developing the property. His estimate was far less than the final cost of the property development and the company incurred close to $1 million in additional costs. In response to this loss, the company sued the general counsel for breach of fiduciary duty, negligence and conflict of interest. The case settled for $500,000.

Unauthorized Practice

A general counsel of a publicly traded technology company, admitted to practice law in California, wrote and revised legal documents for a sister company located in Hawaii.

An independent third party company used the documents to negotiate a contract. Shortly after, they discovered that the documents had several inaccuracies and misrepresentations. As a result, the independent company lost substantial sums of money. The independent company alleged that the general counsel was negligent in giving legal advice. In addition, the independent company notified the Office of Disciplinary Counsel to investigate unauthorized practice of law as they were not licensed to practice law in Hawaii. The matter settled for $3 million dollars.

Pro Bono.

An attorney at a recruiting company agreed to take a case pro bono for an environmental advocate nonprofit group. The group often speaks out against polluters, developers and other private entities. A third party brought suit against the nonprofit for publishing defamatory statements. After numerous negotiations the attorney recommended a settlement amount. After the case resolved, the nonprofit was dissatisfied with the result of the case and sued the attorney for misrepresentation. The claim cost more than $270,000 to resolve.

As a telecommunication service provider, your company takes pride in the reliability of your network and advertises 99.9% uptime. A serious network outage is caused by faulty switching software. Unable to connect with your customers for several hours, customers allege hundreds of thousands of dollars in lost sales. Your company’s professional liability carrier denies coverage for the claim based on the “breach of warranties and representations” exclusion. Coverage surprises like this can cause lots of disruptions.

Your C & D company manufactures components for a large computer manufacturer. Despite rigorous quality control by both entities, a problem with the computers is discovered after thousands of products have been sold. The root cause of the problem is determined to be the components that your company manufactured. The computer manufacturer seeks payment to replace faulty components, and alleges additional financial injury from damage to their reputation, as evidenced by lost sales.

Your Information Technology employee installs a software upgrade for your customer, but fails to properly back up the data. After a successful installation, your company’s tech realizes the data associated with the application has been deleted. Unfortunately, your client had not backed up data for a few days.

Needless to say, your customer is not happy and your company is billed for recreating the data. Your claim is denied by your general liability carrier because loss or damage to software and data is excluded from your policy and now you have to deal with this issue, on your own.

Minimization of Seller Liability. A private equity or venture capital seller near the end of a fund’s life wishes to limit post-closing indemnification liabilities on the sale of a portfolio company in order to safely distribute deal proceeds to the limited partners, but the buyer wants a high cap on potential indemnities or a long survival period for the reps and warranties at issue. Insurance could be the means to bridge this gap.

Bid Enhancement. A competitive auction process is being held by a seller of prime assets. A potential buyer wishes to distinguish his or her bid from others by arranging and agreeing to look to a reps and warranties insurance policy to reduce or take the place of an indemnity from the seller. Such a use of insurance could elevate the likelihood of the buyer winning the auction.

Foreclosure Services

Situation Real estate agent was retained by a bank to list and remove all garbage from or “trash out” a fore closed property.

Action Plaintiff filed suit against the bank, mortgage servicing company and real estate agent for wrongful eviction and destruction of property.

Result After a long litigation process, the matter settled for $80K with defense costs of $230K.

Commercial Leasing

Situation Real estate agent represented a lessee of a warehouse. Less or sued the lessee for failing to pay security deposit and rent under the lease. Lessee then sued the real estate agent for failure to negotiate correct terms of the lease.

Action: Allegation of negligence by real estate agent in the execution of lease agreement.

Result: The matter settled for $22K with defense costs of $70K.

Description of Event: Real estate agent was hosting an open house. A potential buyer visited the house and slipped in the kitchen, breaking his arm during the fall. Before the open house, the agent had used a wood cleaning product on the linoleum kitchen flooring, causing the surface to become extremely slippery and hazardous.

Claim Resolution: The total cost to defend the real estate agent and pay for the judgment rendered against them amounted to $80,000.

Claim Notes: A Franchise Owners liability policy will respond to defend their interest in the above referenced matter; however, their policy will most likely not respond to cover the individual Sales Associate. Typically, independent contractors are excluded from the definition of “Insured” with respect to a Franchise Owners policy. That is why all Sales Associates must maintain their own commercial general liability insurance policy.

Description of Event: Real estate agent was on his way to a meeting in a personally owned vehicle and was involved in an accident while talking on his handheld cell phone. The agent struck a pedestrian in a crosswalk, causing severe bodily injury. Learning that the agent maintained minimal personal automobile liability limits, the plaintiff also took action against the Franchise Owner.

Claim Resolution: A jury issued a verdict in the amount of $825,000 in favor of the plaintiff.

Claim Notes: Typical Hired/Non-Owned Automobile Liability coverage for Franchise Owners would not respond to cover this type of loss as “independent contractors” are not covered under most policy forms. The A & D Real Estate Insurance Guard policies for Franchise Owners have been specifically endorsed to cover these types of scenarios, assuming that the Sales Associate maintains the required personal liability limits set forth in the Independent Contractor Agreement

A refrigeration contractor was hired to upgrade the refrigeration system of a cold storage warehouse. An ammonia leak was caused by the failure of a valve in the system. Seventeen neighbors were hospitalized and business operations were interrupted from the shutdown of the warehouse. The contractor incurred $1.75M in third party bodily injury, property damage and defense costs. Contractors Pollution Liability $1.75 million.

Scenario 2

A general contractor sub-contracted masonry work for a warehouse project. The masonry sub-contractor did not construct the loading dock according to the design plans. The general contractor was accused of poor supervision and was held responsible for damages of $350,000 including costs to rebuild the loading dock. Professional Liability claim for $350,000

Scenario 3

A construction manager oversaw the construction of an office building. He sub-contracted the design of the heating and ventilation systems to a mechanical contractor. The sub-contractor miscalculated the cooling needs of the building, which resulted ina $450,000 professional liability claim resulting in $450,000 in damages for replacement of the system, mold remediation, and relocation of the tenant during repairs, Professional and Pollution Liability claim $450,000