Summary: Businesses can be sued for a variety of reasons. One of the most common reasons is negligence. Ordinary negligence and professional negligence are two types of legal complaints impacting small businesses. Find out more about these types of complaints and how to prevent your business from a costly negligence lawsuit.
Ordinary Negligence or Professional Negligence: Which Could Apply to Your Business?
Mistakes can occur in any industry, but even more so for businesses that sell services or professional knowledge in their field. If a company gets sued over an oversight or inaccuracy, it could potentially ruin them both in reputation and financially. One of the most common and expensive lawsuits directed at small businesses is negligence suits. Two similar yet different types of negligence complaints are ordinary and professional.
What is Ordinary Negligence?
Negligence happens when someone fails to fulfill certain duties or obligations. It often occurs unintentionally; however, gross negligence or intentional negligence can happen.
Ordinary negligence is a failure to meet ordinary or standard care. It typically refers to a careless mistake that caused harm to others. Any business or individual can be accused of ordinary negligence, and it is the foundation of all personal injury claims.
A person or business could be held liable for physical or financial harm caused by the careless mistake because they didn’t abide by the duty of care. Ordinary negligence has to be established by the proof of four elements:
- Duty of care
- Breach of duty of care
- Causation
- Damages
What is Professional Negligence?
Professional negligence is similar to ordinary negligence, but it occurs explicitly between a professional service industry worker and their clients where there could be a mishandling of duties to a client and an established contract. Clients hire certain professionals, such as lawyers, doctors, IT consultants, architects, real estate agents, insurance professionals or accountants, for their specialized skills and standard of care. However, any service-based business can be vulnerable to complaints about professional negligence. To avoid being accused of professional negligence, one must adhere to the same standard of care that well-qualified professionals acting under the same circumstances would.
Examples of potential professional negligence issues include:
- Incorrect legal advice
- Medical malpractice
- Computing errors
- IT errors, such as poorly secured data
Duty of Care
Tim Barrett, Vice President of Professional Lines at AmTrust Financial, explains, “Certain professionals, such as lawyers, doctors and accountants, are known for their expertise and specialized type of customer care. However, any service-type of professional can be vulnerable to complaints of professional negligence because they have breached a standard of care with their clients.”
Professional negligence happens when a professional service worker breaches their duty of care with a client.
Duty of care is defined as a fiduciary responsibility requiring company directors to live up to a certain standard of care and make decisions in good faith and a reasonably prudent manner. Professionals must comply with their specific industry standards, either through licensing or organizational requirements.
Malpractice
Malpractice is a type of professional negligence that can imply intent, though the intent might not be to harm. It is usually synonymous with healthcare professionals, but nearly any small business that provides professional services can be held responsible for issues with their service and fall under the scope of malpractice.
Professional Negligence Lawsuits
Small businesses can often be served with professional negligence lawsuits, even if they perform their responsibilities correctly. However, claims can come from factors that can be out of their control, causing a need for legal counsel, including:
- Unmet expectations of the partnership
- Personality conflicts with customers or clients
- Misunderstandings because a contract wasn’t read properly
If you are sued for professional negligence, the court will decide if you followed your business’s duty of care by looking at two methods:
- Foreseeability tests: These tests determine if you could have reasonably predicted that the potential negligent actions could hurt your client or customer.
- Multifactor tests: These tests look at several factors to determine the duty of care, including the extent of the damages, whether another action could have been taken, the cost of taking another action and if the other option would have been safe.
The court will find negligence if there is evidence that the provided service fell lower than the expected standards of the profession or industry and result in negative consequences such as financial loss, injury or damages to the customer.
Best Practices to Protect Against Professional Negligence
Claims of negligence can cause expensive legal costs, impact a business’s existing and potential new business, and ruin its reputation. There are many ways to avoid a professional negligence lawsuit, but the best way to reduce the chance of one is to keep your customers and clients happy.
Best practices for reducing the chance of professional negligence lawsuits include:
- Stay up-to-date with the latest developments and compliance requirements in your industry
- Know your state’s duty of care laws
- Do not offer advice to clients that you are not qualified to give
- Set realistic expectations for outcomes with your customers
- Provide timely and quality service to your customers and clients
- Ensure that client contracts have a clear scope of work with detailed responsibilities, deliverables and deadlines
- Establish clear and regular communication with clients, including notifying them of any problems and updates to your timeline
- Document everything, such as all client communication, emails, meetings and calls
Professional and Management Liability Insurance
Mark Butler, Vice President, Underwriting, Head of Underwriting Management Liability at Amtrust EXEC, describes the importance of having insurance to cover professional negligence risks, “Owning and managing a small business comes with many potential negligence risks including shareholder litigation, alleged employee discrimination, harassment or mismanagement of company’s benefits program and more. Organizations can protect themselves by investing in management liability insurance to cover their teams and businesses against these types of claims.”
Another way to protect your business from the expenses of a professional negligence lawsuit is to have professional liability or
error and omissions (E&O) insurance. This type of insurance is a claims-made policy, which means that the policy needs to be active during the negligent situation and when you report the claim to the insurer. Some clients require professional liability coverage before signing off on a project. Therefore, businesses should understand their risks and have the correct insurance coverage. Professional liability insurance will not cover illegal acts or intentional harm to a customer or client.
Professional liability insurance will cover:
- Legal fees, judgments and settlements up to the policy limits
- Claims and damages
- Alleged or actual negligence
- Personal injury as libel or slander
- Malpractice
In addition to professional liability insurance, businesses should also determine if their risks require additional coverage for their executive teams.
Management liability insurance is a package of insurance policies designed to protect a company and its directors, officers, board members, managers and administrators from lawsuits alleging mismanagement. This type of coverage protects against risks not covered under a commercial general liability policy with the intent of protecting decision makers for actions and decisions made within the scope of their duties. Management liability is a valuable provision meant to protect against misrepresentation, vendor/supplier lawsuits, breach of duty, shareholder complaints and other management hazards, so that executives and managers can have peace of mind to focus on making decisions that will grow and cultivate their business.
AmTrust Understands the Risks to Management Teams
AmTrust EXEC understands the unique risks facing executive teams at privately- or publicly-held companies. Our
Management Liability coverage offers a full suite of products for medium- and large-sized businesses. We provide creative management liability solutions for their clients, with our experts in underwriting and operations working directly with company decision-makers.
Contact us for more management liability information.
This material is for informational purposes only and is not legal or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.