Professional liability insurance, also known as errors and omissions (E&O) insurance, is a critical safety net for any professional. It protects you from claims of negligence or failure to deliver a professional service, covering legal defence costs and any resulting damages. For many, it provides peace of mind, allowing them to focus on serving their clients without the constant fear of a ruinous lawsuit.
However, simply having a policy isn’t enough. Many professionals mistakenly believe they are fully protected, only to discover their coverage is invalid when they need it most. Certain actions—or inactions—can inadvertently void your policy, leaving you personally exposed to significant financial and reputational damage.
Understanding the common pitfalls is the first step toward ensuring your coverage remains intact. This article will explore the top five mistakes that could lead to your professional liability claim being denied, and provide actionable advice on how to avoid them.
Before you find yourself facing a denied claim, avoid costly mistakes and secure proper professional liability coverage through St. Andrews Insurance—trusted experts in protecting professionals across Canada.
Mistake 1: Misrepresentation or Omission of Information
When you apply for professional liability insurance, the insurer bases your premium and coverage terms on the information you provide. Honesty and accuracy during this process are not just recommended; they are required. Misrepresenting facts or omitting crucial details can lead to your policy being voided from the start.
Insurers use your application to assess the level of risk you present. This includes details about the nature of your business, your annual revenue, your previous claims history, and the specific services you offer. If you knowingly withhold information—such as a past lawsuit or that you offer high-risk services—you are misleading the insurer. They may issue a policy based on an incomplete picture of your risk profile. If a claim later arises related to the undisclosed information, the insurer has grounds to rescind the policy, arguing that they would not have issued it, or would have done so under different terms, had they known the full truth.
For example, consider a marketing consultant who fails to disclose on their insurance application that they also provide web development services, a higher-risk activity. If a client sues them over a faulty website that crashed and caused a significant loss of revenue, the insurer could deny the claim. They would argue that the policy was issued based on the lower risk associated with marketing consulting alone and that the omission of web development services was a material misrepresentation.
Mistake 2: Failure to Report Claims Promptly
Your professional liability policy will include a clause that requires you to report any potential claim to your insurer as soon as you become aware of it. This is often referred to as a “duty to report” or “notice provision.” Failing to do so in a timely manner is one of the most common reasons claims are denied.
Insurers need to be notified promptly so they can begin their investigation, preserve evidence, and mount an effective defence strategy. A delay can prejudice their ability to manage the claim, potentially leading to a worse outcome and higher costs. Even if you believe a client’s complaint is baseless or unlikely to escalate into a formal lawsuit, you are still obligated to report it. What might seem like a minor issue can quickly evolve into a serious legal matter.
The consequences of late reporting can be severe. Most policies are “claims-made,” meaning they only cover claims that are made and reported during the policy period. If you learn of a potential claim but wait until after your policy has expired to report it, your new policy may not cover it, and your old insurer can deny it for late reporting. This leaves you in a coverage gap, facing legal costs on your own. Always err on the side of caution: if a client expresses dissatisfaction that could lead to a claim, notify your insurer immediately.
Mistake 3: Working Outside Your Area of Expertise
Professional liability insurance is designed to cover you for the specific professional services you are qualified and declared to provide. When you venture outside your defined scope of practice, you not only increase the risk of making an error but also risk stepping outside the protection of your policy.
Your policy documents will clearly define the “professional services” that are covered. If you perform work that falls outside this definition, any resulting claim will likely be denied. For instance, an accountant who offers informal investment advice to a client could find themselves uninsured if that advice leads to financial losses. Their policy covers accounting services, not financial advising, which requires different qualifications and carries different risks.
To avoid this, it’s essential to have a clear understanding of what your policy covers. Regularly review the “professional services” definition in your policy documents and ensure it accurately reflects the work you do. If you expand your services, contact your insurer to update your policy. Staying within your professional boundaries not only represents good business practice but also ensures your liability coverage remains valid.
Mistake 4: Breach of Confidentiality
As a professional, you are entrusted with sensitive client information. Upholding confidentiality is a core ethical and legal duty. A breach of this trust can lead to significant legal trouble and reputational harm. It can also jeopardize your insurance coverage.
While professional liability insurance is designed to protect you from claims of negligence, it may not cover intentional or illegal acts. Many policies contain exclusions for fraudulent, criminal, or malicious conduct. If you deliberately share a client’s confidential information without their consent, an insurer could argue that this was a willful act and deny coverage for any resulting lawsuit.
For example, a therapist who discusses a patient’s case in a public setting could be sued for breach of privacy. Because the act of breaching confidentiality was intentional, their liability insurer might refuse to cover the legal defence or any subsequent damages. It is crucial to maintain strict confidentiality protocols within your practice to protect your clients and ensure your actions do not give your insurer a reason to deny a claim.
Mistake 5: Not Having Adequate Coverage Limits
While having insufficient coverage won’t void your policy, it can have the same effect: leaving you personally responsible for substantial costs. Selecting the right coverage limit is a critical decision that requires careful consideration of your specific risks and potential for loss.
Many professionals underestimate the potential cost of a lawsuit. Legal fees alone can quickly run into tens of thousands of dollars, even for a claim that is ultimately dismissed. If a judgment is made against you, the damages awarded could be far more. If your policy limit is too low, you will be responsible for paying any amount that exceeds it. For example, if you have a $250,000 policy limit but are faced with a $500,000 judgment, you will have to pay the remaining $250,000 out of pocket.
Regularly review your coverage needs with your insurance broker. Factors to consider include the size and type of your clients, the value of the projects you work on, and any contractual requirements for insurance. As your business grows, your risk exposure will likely increase, and your coverage limits should be adjusted accordingly.
Protect Your Practice and Your Peace of Mind
Your professional liability policy is a vital asset, but it requires active management to remain effective. By avoiding these common mistakes, you can ensure your coverage is there for you when you need it most. Be transparent with your insurer, report potential claims immediately, work within your expertise, protect client confidentiality, and maintain adequate coverage limits.
Taking these steps will help you safeguard your business, your finances, and your professional reputation, allowing you to operate with confidence.
