Jeff Sloan, founder & CEO of StartupNation, discusses professional liability and errors and omissions (E&O) coverage with Michael Spath from Kapnick Insurance and Kapnick partner and leader of specialty risk, Doug Miller. Here are highlights from that conversation about why your business needs to go beyond general liability to have professional liability.
Tune in below to listen to the entire conversation:
Michael: Let’s talk about professional liability insurance and E&O insurance. Could you just give a little bit of a framework of the difference between general liability and professional liability?
Doug: Yeah. Sure. Good topic. I think the main thing when you’re differentiating between general liability, which most people understand intuitively that’s sort of your bodily injury or property damage scenario. Professional liability is more of a financial loss, and typically when I think of it, I think of it as a financial loss to the customer.
So if you’re a firm and you’re selling a service, maybe not a tangible product per se, but a service. What would happen if your customer alleges that that service you provided was somehow deficient, and in fact caused them some type of financial harm? And they came back after you, alleging you’re negligent and providing that service. That’s really kind of the way to think about it.
Michael: And you bring up the general liability. ‘Cause I run into a lot of clients who say, “Hey, um, I’m doing consulting work with a company they’ve asked if I have general liability insurance.”
And I say, “Yeah, we can write that, but what you really need is professional liability.”
Why is there a disconnect?
Doug: I think especially for smaller and startup organizations, the professional could be even more important than the general liability.
If you think about it, they have limited amount of funds available to protect themselves in the event that there’s an issue. They’re just starting out; they’re developing new customers. If they have sophisticated, large customers that may have deep pockets, they have the ability to come after you, legally.
It may not even be true. It may, just be an allegation that your product or service was deficient, but just protecting yourself from a customer that you don’t fully know or understand yet. I think for a lot of startup organizations in particular, it’s perhaps probably even more important at the end of the day than general liability.
General liability is sort of a throw in coverage with a bit what we call a business package policy. It’s pretty inexpensive, and it’s pretty common. So most people understand that and are used to that. But what they’re not used to is this whole professional liability space. And like you alluded to, it can vary pretty dramatically in terms of what type of service or product you’re selling in the first place, so the underwriting varies pretty dramatically depending on that as well.
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Michael: When someone asks me, well, what type of company needs professional liability? And I say, if you’re providing a service with and less of a product, right?
You know, we’re sitting on chairs right now, that’s a product we’re sitting at a table with a desk in front of us. That’s a product. But if you’re doing consulting work, that is a service. And if a client ends up saying, “You created a financial loss,” your general liability is not going to cover that. Your professional covers the service that you’re providing. Not only if you are found liable, but it’s going to cover those defense costs.
Doug: The defense cost is very important. So a lot of times these types of lawsuits are frivolous or they’re questionable. Maybe the customer is just mad or is not a hundred percent satisfied, but is very aggressive from a legal perspective and comes after you with a lawsuit.
The cost to defend yourself against those types of claims, even if you have no liability and there is no settlement at the end of the day, uh, and or if you wish to fight it in court, those defense costs can be pretty expensive.
If you think about the tangible product manufacturer, the chair example, what could happen with the chair? Well, it could break. I could hurt myself. I could fall off of it. It may not work the way it’s supposed to. Those are more of a sort of bodily injury/property damage related type of matters.
Michael: Earlier in the podcast we spoke to Dre Wallace of Opener, and she has this great company where she’s trying to connect those musicians with the venues who, honestly, probably don’t have problems filling their Friday and Saturday night spaces, but they have problems filling their Tuesday and Wednesday and sometimes Thursday night spaces or Sunday afternoon spaces.
And so she’s created this software platform and this is another type of professional liability–errors and omissions coverage, we call it tech E&O–and that’s the software now becomes the product or now becomes the service.
Doug: Right. You can start to imagine what the risk is. There’s many levels of things that could go wrong. The software could infringe on somebody else’s copyright. The software could simply not work the way it was designed or the way it was advertised to the venues or the musicians.
In that case, there’s going to be a disconnect between the two parties and there’s going to be some kind of problem that may result in some kind of financial harm to one or the other parties. And that’s more than just a service. It’s an actual piece of software that provides a service, and they’re licensing it or selling that presumably to, I guess, to the venues in this case.
Michael: There’s a couple of other pieces of it that Dre talked about, including selling customer information to the venues so that fans of these bands can track them wherever they go. The venues then have ownership of information about those customers. And so, hypothetically, if that software fails and I’ve spent a couple thousand dollars on access to 500 fans, well, then what did I pay for? I want my money back, right.
Doug: And if you can’t work that out commercially with the seller of the software, a lot of times that can lead to litigation risk, or not even litigation, but perhaps an attorney demand letter, which would typically trigger a claim under these professional liability policies.
For that type of scenario, that type of example, professional liability, or in this case, tech E&O, would cover that. Software copyright infringement risk would be important.
Michael: Doug, final question for you. Everybody will always ask: What is this going to cost to someone? And I always kind of give a standard answer, it depends on a couple of things.
I’m not going to say, hey, it’s going to be a thousand dollars or it’s going to be $10,000. But what are those things that the underwriters are going to be considering when they’re looking at either a professional liability policy or a tech E&O policy? What are some of the factors that are going into, um, determining that?
Doug: I’d say the main underwriting factor is frankly, the volume of business or projected volume of business. The more you sell, the more customers you have and the more customer risk you have. So for a lot of startups, it’s actually projected revenue because they may not have a lot of revenue in year one.
So first-year projected revenue. The more you sell the more, again, more customers, you have the larger amount of exposure you have in terms of the product or service that you’re selling. So that I would say that’s the number one rating factor.
Then it falls into what type of product or service. So if it’s a software versus management consulting software may be a little bit more expensive because of the copyright angle. Whereas if you’re a business management consultant, you don’t really have copyright risk, for example. So that might be less relatively speaking.
Michael: The good news is that if you find yourself in one of these careers — if you’re in a management position of a business such as this, a consultant, an accountant or attorney, or you’re in the technology space, you’re a software designer, things of that nature–you can reach out to us at kapnick.com and we can lead you through every step.
Doug: Absolutely. Our job is not to sell insurance; it’s to advise clients about business issues and emerging business issues. Insurance is just one of those issues.
