While disputes with clients over negligent, unfinished, or inadequate work make up the bulk of cases, professional liability lawsuits can also encompass similar disputes with business partners.
What is the legal basis for a professional liability lawsuit?
The legal "causes of action" for a professional liability lawsuit can vary from negligence (an allegation that you performed carelessly or didn't meet industry standards) to breach of contract (you didn't follow through on your business agreement). To make their case, the plaintiff will have to establish that:
- Your work needed to uphold certain professional standards, either loosely defined by your industry's standards, a client's reasonable expectations, or explicitly defined in a contract (completion date, use of certain materials, etc.).
- Your work did not meet these minimum standards.
- The plaintiff suffered damages.
- Your work caused these damages. If the plaintiff would have lost money regardless of what you did or didn't do, you can't be held liable.
If the plaintiff proves all four of these points, the judge may order you to pay a judgment, which would be covered by your professional liability policy up to your policy limits.
Even if the plaintiff fails to prove that you made a damaging professional mistake, you'll still be responsible for the cost of hiring a lawyer and mounting a legal defense. Your policy will cover these expenses, too.
What common situations can lead to a professional liability lawsuit?
A number of small, common errors can expose your business to professional liabilities. For example:
Misunderstandings. Even if you accurately describe both your products, services, prices, and expected outcomes, a client might form unrealistic expectations for your work. When their expectations don’t materialize, they may sue your business.
Clerical errors. A clerical error in an email, contract, or the shipping address for important deliverables can cause miscommunications and delays in your work.
Failure to disclose. If you don’t provide adequate instructions to a client, the client may hold you responsible for any financial damages they suffered.
Missed deadlines. An interruption in your supply chain or business workflows could make you liable if your client doesn't get what they need on time – even if it's out of your control.
What are some examples of professional liability lawsuits?
Architects sued for professional negligence and breach of contract
In December 2019, Princeton University filed a $10.7 million lawsuit against an architectural firm and its engineering sub-consultant over the design and construction of the school’s Andlinger Center for Energy and the Environment.
In the suit, Princeton alleged that the design team of Tod Williams Billie Tsien Architects (TWBTA) and its sub-consultant, Jacobs Entities, "failed to perform their professional design responsibilities in accordance with the prevailing standard of care, resulting in unnecessary and excessive additional costs and expensive project delays."
Work on the center started in 2012 and was completed in January 2016, approximately 10 months behind schedule. The university filed the suit to recover the significant costs related to the building delays. The details of the settlement are confidential, but in addition to the damages, the case resulted in substantial legal fees for both TWBTA and Jacobs Entities.
Bank sued for professional negligence, software errors
In another case of professional negligence, a New Jersey pastor filed a 2019 lawsuit against Wells Fargo claiming that its carelessness led to a forgery charge and his false arrest.
The pastor, Rev. Jeffrey Edwards, had been regularly using the same ATM for years. One day, someone used that machine to deposit fraudulent checks. According to the suit, the bank mistakenly gave the police a photo of Edwards using the ATM, erroneously linking him to the check forgery case. The pastor was arrested, and his photo was posted on a state police Facebook site.
Wells Fargo later admitted fault and wrote an apology to Edwards. But when Edwards asked the bank to pay his legal fees, Wells Fargo refused, and he had to take the case to court.
And in another Wells Fargo case, it was revealed that a software error in the bank’s mortgage underwriting system denied mortgage modifications to many qualified applicants. This led to hundreds of mistaken foreclosures.
In 2018, the bank admitted the error and set aside $8 million to compensate affected customers. But that wasn’t enough to cover the devastating impact the loss of their homes had on many lives. The result was a class-action lawsuit, accusing the bank of “improperly filing mortgage payment change notices” on borrowers. Wells Fargo was ordered to pay over $13 million to settle the lawsuit.
How can you reduce your business’s professional liability?
To decrease the chance of facing a professional liability lawsuit, implement the following risk-reduction measures:
Use contracts. Make sure your contracts clearly define obligations, project timelines, and compensation, so you can manage client expectations from the start. Work with an attorney to ensure your contracts are legally sound.
Get everything in writing. Be sure to document all communication with clients. If you chat with a client on the phone, send a follow-up email. A paper trail will help clear up any disagreements about what was said in the past.
Keep clients in the loop. If clients are continually apprised of your progress and potential pitfalls, they are less likely to be surprised by the outcome. Plus, transparency builds trust, which also helps deter lawsuits.
How does professional liability insurance protect your business?
Despite your best efforts to avoid a professional liability lawsuit, a dissatisfied client may still decide to sue you. Professional liability insurance covers your legal costs, including:
- Lawyer’s fees
- Administrative expenses
- Court fees (filing fees, court reporter fees, etc.)
- Expert witnesses
- Settlement costs (settlement payments, mediation expenses)
- Court judgments
Also, if your professional liability policy includes a "right and duty to defend" clause, you won't have to worry about spending time mounting your own defense. This provision shifts the burden of managing the case from you to your insurance provider.
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