Case Study: Which Way Do I Turn? Understanding the difference between professional liability and products-completed operations
There are over 7,000 manufacturers of medical devices in the US, mostly small and medium-sized enterprises with 80% having less than 50 employees.1 Many small life science business owners are scientists and entrepreneurs, whose passion drives their work, research, discovery and innovation. To be successful, they must also be savvy business and financial professionals. Insurance requirements can be a conundrum, or a “necessary evil” for small business owners who often have to “learn as they go” by asking questions, such as “what type of coverages do I need to have in place” and “how affordable are the appropriate coverages?”
A Comparison: Products/Completed Operations and
Professional Liability Policies
Products/Completed Operations Liability Policies – This kind of coverage was developed to respond to claims by third parties arising out of work performed or products sold. This coverage responds when the insured has completed the work and/or the product is no longer in the possession of those who handled it in the marketplace, such as the manufacturer, wholesaler and retailer, and a third party alleges that the product or work has caused bodily injury or property damage.
Professional Liability Policies – In contrast to products/completed operations, professional liability policies respond to claims by third parties for alleged injury sustained because of the professional judgment of the covered “professional.” In this context, the term “professional” means something more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for the production or sale of commodities. The unique purpose of professional liability policies is to offer protection not for conduct engaged in by the ordinary individual in his or her employment or vocation, but rather, for the extraordinary skills of the professional.
When Injuries Arise out of the Insured's Work or Product
When the need for products/completed operations and professional coverage is confused, the consequences can be severe for the insured. The following case studies illustrate circumstances under which the insured relied on professional and general liability coverage but should have, instead, purchased products-completed operations liability insurance and general liability:
Case Study I: A Technician Crosses the Wires
A hospital hires a company to change the adaptors on its anesthesia machines. Unfortunately, the company’s technician accidentally crosses the anesthesia machine’s tubes during the process. A short time later, a patient undergoes surgery in one of the operating rooms and is administered nitrous oxide instead of oxygen.
At the time of the incident, the company’s coverage includes professional and general liability with a products-completed operations exclusion. The company’s general liability insurer disclaims coverage under the products and completed operations hazard exclusion since the company’s work was completed and the machine was put to its intended use. The company’s professional liability insurance coverage also does not apply, since the technician who changed the adaptors did not have the specialized training or expertise that qualified him as a “professional” under the terms of the policy. Accordingly, the company is left without any insurance protection.
Case Study II: A Salesperson Gives Faulty Instructions
Following foot surgery, a medical supplies distributor provides a recovering patient with a thermal compression therapy unit to help reduce swelling. One of the distributor’s salespersons mistakenly instructs the patient to use the unit twenty-four hours a day for seven days—much longer than necessary. As a result of the patient’s prolonged use of the unit, she suffers extensive injuries resulting in amputation of four toes.
Unfortunately, the distributor only has a general liability policy with a products-completed operations exclusion, and a professional liability policy. The general liability insurer disclaims coverage pursuant to an exclusion for completed-operations. The policy specifies that “work” is deemed completed when all of the work called for in the contract is complete. Accordingly, the distributor’s work was completed when it provided the machine to the patient, and there was no coverage under the general liability policy. The distributor’s professional liability insurance coverage also does not apply, since the salesperson is not qualified as a “professional” under the terms of the policy. The company is left without any insurance protection for the salesperson’s faulty instructions.
Case Study III: An Employee Mislabels a Product
A company labels and sells pharmaceutical products to pharmacies and hospitals. A company employee mislabels a product, and in turn, a patient ingests a non-prescribed drug and suffers significant adverse effects requiring hospitalization and extended care from a treating physician.
The injuries sustained by the patient are the result of the labeling error, and since the employee who mislabeled the medicines does not qualify as a “professional” under the terms of the manufacturer’s professional liability policy, the company is left without any insurance protection for the labeling error. In each of these circumstances the bodily injury claims arising from these losses would have been covered under a products-completed operations liability insurance policy.
Conclusion - The key to determining which type of coverage applies is identifying who provided the service and exactly what actions were performed at the time of the damage or injury. Consider whether the potential claims will be alleged against a professional or a lay person. Further, if the negligent acts will be alleged against a professional, will they be the kind that involves the exercise of specialized skill or judgment? If not, the exposure to loss likely will be covered by the insurance company providing products-completed operations liability coverage. In addition, if work performed by a lay person is alleged to be the cause of property damage or bodily injury, professional liability coverage likely will not provide the needed insurance protection.
1 BMI Research - United States Medical Devices Report Quarter 3 - 2018
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