Professional liability insurance is a contract that obligates an insurance company to defend an insured person and to pay a judgment entered against an insured person up to a set policy amount. This kind of insurance provides people with financial protection from lawsuits relating to their profession. Insurance companies often sell professional liability insurance or malpractice insurance to doctors, lawyers, architects, engineers, and many other professionals. The person buying the insurance is the insured. The insurance company may also settle a claim against the insured out of court.
The duty to defend the insured is an obligation that arises from professional liability insurance. Typically, the insured person submits a claim to the insurance company, if a client or patient files a lawsuit against the insured in his or her professional capacity. The insurance company will then determine whether the insurance covers the claim. If the claim is covered, the insurance company must pay a lawyer or a law firm to defend the insured against the lawsuit. The lawyers representing the insured will then take action to file a response to the lawsuit, represent the insured in court, advise the insured, and make recommendations as to whether the insured should authorize the case for settlement out of court.
Professional liability insurance also creates a duty to indemnify the insured. This means that the insurance company must pay a judgment entered against the insured up to an amount specified in the insurance contract. An insurance company that fails to defend or indemnify an insured person in accordance with the professional liability insurance agreement will be in breach of contract. The insured can then file a lawsuit against the insurance company for violating the contract. An insurance company that refuses to pay a valid claim or to defend an insurer is said to be acting in bad faith, which means the insurance company does not have a valid basis to use in denying coverage.
The law obligates professionals such as doctors, lawyers, and architects to provide services based on a certain standard, generally one that the profession establishes as acceptable. For example, a lawyer must perform legal services with diligence, skill, and knowledge that other lawyers in the community typically exercise. A lawyer that fails to meet this professional standard may face a malpractice claim. Professional liability insurance would then operate to protect the lawyer by covering the costs to defend a claim or to pay a judgment entered against the lawyer for malpractice.