What distinguishes products, completed operations and professional liability?
A product is a good sold to consumers. Think about “things” when you think about products. Products liability covers the business which manufactures the product against injuries, illnesses or property damage caused by the product.
Completed operations are usually contracted building services which have a beginning point and an end point, like installing a heating, ventilation and air conditioning (HVAC) system. Since it is part of a greater system of insulation, walls, floors, ceilings and lights, HVAC is not a stand alone product. The outdoor compressor is. The installation is an operation.
Professional liability insurance covers service oriented business: designers, architects, dentists, doctors, or hair stylists. The key distinction is service versus a product or an installation operation.
So, how does this distinction affect claims negotiations?
Professional liability claims imply poor professionalism which directly affects your reputation. The paid claim implies dereliction of duty or incompetence.
The insurance company’s response to any claim is a business decision – determine the long-term cost of settling and benefit of not paying the claim, pay accordingly. Your reputation does not fit into this decision matrix.
The buying public saw this decision as a conflict of interest. The insurance company did not have to live with a loss of reputation, the professional did. Now the companies offer this solution:
The professional can veto the claims payment.
If the professional chooses to do so, the insurance company is limited to the agreed upon claim amount as their new maximum limit, including legal and claims costs to that point in time.
An architect, with a $1,000,000 professional liability policy, inspects a property and determines the structure is unsafe for renovation. The contractor talks the owner into going forward anyway. The building collapses. The owner sues the architect for “allowing” the contractor to start work before the structural issues are addressed. The insurance company offers a settlement of $100,000 after spending $25,000 on legal fees.
The architect can either endorse the settlement and pay the client or he can refuse, but now his coverage limit drops to $125,000 inclusive of legal fees. It is a much more difficult reputation decision than a business decision.
