Professional Liability Insurance:

why you need it and what to watch out for

Welcome!

Timothy Soefje, Managing Member of Stamer, Chadwick, Soefje, PLLC

Daniel Oberheu, Managing DirectorMcGowan, Donnelly & Oberheu, LLC

What is a Professional?

• A professional is a member of a profession.

• The term also describes the standards of education and training that prepare members of the profession with the particular knowledge and skills necessary to perform the role of that profession.

• Most professionals are subject to strict codes of conduct enshrining rigorous ethical and moral obligations.

What is a Professional?

• Professional standards of practice and ethics for a particular field are generally agreed upon and maintained through widely recognized professional associations.

• Some definitions of “professional” limit this term to those professions that serve some important aspect of public interest and the general good of society.

The need for Professional Liability

Insurance stems from...• Standards of care for professionals

and the concept of professional negligence.

• Contractual requirements.

• Other insurance policy requirements.

Heightened Liabilities for Professionals

As professionals, we:

• Have special skills and experience in their field.

• Are held to a higher standard of care.

• Perform services for others for a fee.

Intellectual vs. Physical

Legal Foundations for Professional Liability

Every lawsuit turns on two independent questions:

1)What is the applicable “Standard of Care”?

2)What do the contract terms require?

Legal Foundations for Professional Liability

Negligence-based

• Existence of duty• Breach of duty

through act, error or omission• Damages• Proximate

causal connection

Contract-based• Written

agreement• Contract

breached• Damages• Proximate

causal connection between breach and the damages

Four Elements of Negligence

1) Existence of Duty or obligation requiring professional to conform to certain standard of care.

2) Breach of Duty owed (failure to confirm to that standard of care) through act, error, or omission.

3) Damages result from professional’s act, error, or omission.

4) Close Causal Connection between conduct and damages.

Four Elements of Negligence

Every professional negligence lawsuit turns on the pivotal question:

“What is the Standard of Care?”

•This means a professional has a duty to “act as an ordinarily reasonably prudent professional under the same or similar circumstances.”•When a professional falls below this minimum

standard of care, the professional has breached the duty owed to the client and is subject to being sued for damages.

Four Elements of Negligence

1) General rule remains expert testimony needs to establish causation as to conditions outside the common knowledge and experience of lay jurors.

2) Expert witness also must explain how and why the surveyor’s negligence proximately caused the injury or damage alleged in the lawsuit.

3) Absent proximate cause, no liability exists even if the surveyor fell below the Standard of Care.

4) Plaintiffs may recover all damages proximately caused by the surveyor’s breach of the Standard of Care.

Four Elements of Breach of Contract

1)Oral or written contract made between plaintiff and professional.

2)Contract breached by the professional.

3)Plaintiff suffered damages as a result of the breach.

4)Plaintiff’s damages were caused by the professional’s breach of contract.

Four Elements of Breach of Contract

Every breach of contract lawsuit turns on the pivotal question:

“What do the contract terms require?”

Contract Management • Most basic risk management best practice you can undertake.

• Process of systematically and efficiently managing your contracts from creation to execution to maximize profits while minimizing risks.

Years of legal experience will confirm that the contract itself represents the number-one cause

of costly claims and lawsuits.

Breach of Contract and Insurance

Pure Breach of Contract claims and/or lawsuits are not insured by professional liability insurance.

The best way for a professional firm to avoid litigation from Breach of Contract claims is to develop standard protocol and checklists that they will commit to following in every phase of contract negotiations.

No matter whether it is a BIG contract or SMALL contract – a new client or an existing client – use the same process every time.

Varying from a standard protocol may lead to miscommunication, mistakes and bad business decisions.

10 Fundamentals of Contract Provisions

1) Scope of Services

2) Owner / Client Responsibilities

3) Billing and Payment Terms

4) Schedule

5) Termination

6) Consequential Damages

7) Indemnification and Insurance

8) Dispute Resolution

9) Certifications, Guarantees, and Warranties

10) Copyrights

Contractual Requirements for Professional Liability Insurance

from Customers or Clients• Professional Service Agreement (PSA).

• Master Service Agreement (MSA).

• Agreement between Project Owner and Surveyor.

• Agreement between prime contractor and subcontractor.

When contractually required to carry Professional Liability Insurance, watch out for:

• Additional Insured status requirements on Professional Liability policies – try to strike out this provision. Here’s why:oUnreasonable limit requirements and/or unreasonable requirements for length of continuous coverage or ERP/Tail.

• A.M. Best Insurance Carrier Rating Requirements.

• Requirements for Warranties or Guaranties - strike out. oThis is unreasonable and not insurable.

oREMEMBER: Contractually-assumed liabilities may not be covered by insurance.

Other insurance policies may require you to carry

Professional Liability Insurance.

• General Liability policy exclusions and/or warranties.

• Business owners’ policies.

How about Contractors Pollution Liability Insurance?

This can usually be combined with the Professional Liability policy.

Why do other insurance policies not respond to

professional liability claims?

• CGL covers bodily injury & property damage.

• CGL policies exclude professional liability.

• Economic loss is the most likely exposure for the professional service.

Underwriting Professional Liability Insurance

Underwriting and Pricing Challenges

• Variety of exposures

– Limited data

– New case law

– Litigiousness always on the rise

– Varying jurisdictions and clients

– New services being undertaken

Professional Liability Insurance Underwriting

Claims-made and Reported Policy Form

This differs from the trigger for coverage provided by a General Liability policy:

• Retroactive date

• Extended reporting period options (tail)

• Moving insurance carriers “dilemma” on claims-made policies (reporting incidents before switching)

Professional Liability Insurance Underwriting: Application Process

Standard Questions

1)General Information: name, related entities, experience of the firm

2)Fees and receipts

3)Breakdown of firm’s revenues by discipline and project types

4)Claims history

5)Experience/resumes/bios

6)Largest 5 jobs or projects

Professional Liability Insurance Underwriting

Professional Services Covered

• Are the professional services scheduled on the declarations page, by endorsement, or described in the base of the policy language?

• Does the firm do anything “unique” that needs to be addressed with manuscript language on the policy?

Professional Liability Insurance Underwriting

Common Policy Exclusions

•Insured vs. Insured

•Intellectual property

•Warranties & guarantees

•Fraud

•Known errors or omissions

Professional Liability Insurance Underwriting

Specific Exclusions to watch out for on Surveyor PL policies:

• Oil and Gas surveying work• Bridges• Tunnels (be sure you know your policy

language here especially)

Real Life PL Claims ExamplesSample Claim Number 1: 

• Real Estate Developer hires a $100,000 (+/-) annual revenue Land Surveyor in a southern state that has islands off the coast but is connected to the mainland with bridges. Developer has plans to create a RV Park with a hotel (if vacationers want to get out of their RV), shower facilities (if they want to stay in their RV), tennis courts, community pool, and so forth.

• Issue arose from an ALTA survey performed by Insured in 2008. Client of Insured advised that building department had asked Insured to verify the flood zone markings as they did not seem to agree with their GIS maps. Client was shut down by Developer for all work on the buildings by the pool and shoreline because of a concern by the county in question that the flood zones are mismarked on the survey.

• Insured sent the following to Client: “The notes on the old survey show that it uses an older FEMA flood map. The FEMA map had a photo background, but it was degraded by map hatching patterns, known as K series maps. At the time of the old survey, we were still using the previous series of flood maps known as H series maps. The botched photo backings in the K maps caused such an uproar that their roll-out was postponed for a lengthy period so we could try to figure how to go about using them. In the meantime, the older maps were still in use. These old H series maps were simply line drawings with no attempt at a photo background. We scaled on the paper maps from street line intersections, right of way lines, etc. to locate the subject parcel on the flood map.

Real Life PL Claims ExamplesSample Claim Number 1 (Continued):

• Even so, the mapped lines that we were trying to measure between are themselves 10 or 12 feet wide at map scale, making the scaling process very difficult and sloppy. In the later K series maps, the idea was to use the photo backing to locate the subject parcel on the map, so the street lines and intersections were considered unnecessary and were deleted. The lack of visible street lines, when coupled with the failed photo background, made these K maps almost useless.

• Issue cropped up more frequently as older work is compared to new information.

• Admission from Insured: “It appears now that it is my fault. I traced the base drawing, including the flood lines, back for over 12 years. Whatever happened occurred at least that long ago and was never caught.”

Conclusion: The error was a 40' mistake that caused all work to be re-done. What had been done had to be ripped out and returned to "as close as possible to pre-construction conditions.” Then all the work had to be re-designed and re-done.

Cost was roughly $2,000,000 to get to "pre-construction conditions" and approximately $2.2M for the re-design and construction.

The carrier paid $1,000,000, a limit loss, and the underwriter said they would have paid in the neighborhood of $4.2M had the insured been insured to $5M in limits.

Long story short, an error in moving information forward (and government over-sight of flood zone) brought about a $4,000,000 loss.

Real Life PL Claims ExamplesSample Claim Number 2:

• Claimants purchased a property in Texas. When it was originally advertised, it was represented as having a private lake in the back that may be filled in per the town and multiple houses or townhomes may be built. The title company issued a title commitment, which excepted a right-of-way easement 28’ wide across the north line as granted to the town.

• Insured issued a survey showing a 48’ wide drainage easement running east-west through the entire depth of the property along the north property line. It also showed a 38’ radius turn around easement at the very front of the northeast corner of the property. The sellers represented that these were wrong.

• The title company removed the 28’ easement from the exceptions and the survey defendants new survey only showed a 28’ right-of-way easement through a small part of the property under the driveway to the house. Plaintiffs closed on the property and allegedly invested over $700,000 in renovations.

Real Life PL Claims ExamplesSample Claim Number 2 (Continued):

• 3 years later Plaintiff complained about a storm water flow from a commercial property to the town. At that time, Plaintiffs learned that the town had a valid 28’ drainage easement as well as a 38’ turn-around easement encumbering most of the front yard up to the edge of their front door. The city has also informed them that the lake is part of the town's drainage plan and cannot be filled in.

• Plaintiffs alleged if they had known about the easements and the lake restriction, they would not have purchased the property. Plaintiffs made a claim against the title company. They failed and refused to compensate Plaintiffs for the cloud on the title.

• Plaintiffs alleged against the surveyor defendants that they were misled in violation of the Texas Deceptive Trade Practices Act. Plaintiffs pleaded that the actions were unconscionable and intentional. Plaintiffs also alleged negligence against the insured surveyor.

Conclusion: The case settled for the land surveyor after the insurance company paid $90,000 in defense expenses (in excess of Insured's retention) and $150,000 in indemnity to Plaintiffs.

It is unknown whether the town, the title company, the real estate agents, or any other party compensated Plaintiffs for their loss.

Real Life PL Claims ExamplesSample Claim Number 3:

• Two Licensed Land Surveyors, acting as independent contractors, were hired by Insured to do a survey for Plaintiff. Allegations include that the individuals were negligent in their failure to reasonably exercise the duty of ordinary care applicable to licensed surveyors and at their own discretion, allegedly missing call to an existing metes and bounds description, Surveyors thereby changed the boundary line of Claimant's property, resulting in the termination of access to Claimant’s property.

• Surveyors' addition of a missing call to the metes and bounds legal description on Schedule A of the title commitment issued by Stewart Title for the {XYZ} transaction, forwarded to Surveyors with the order for the survey, breached their duty to exercise ordinary care in drawing a survey.

Conclusion: The claim resulted in $130,000 in defenses costs to the benefit of Insured and a $40,000 indemnity payment to Claimant.

It is unknown what Claimant did with the $40,000. A number of parties were sued with various connections to the property.

Questions? Comments?

Thank you for attending!

Professional Liability Insurance:

why you need it and what to watch out for

Daniel Oberheu, Managing DirectorMcGowan, Donnelly & Oberheu, LLC