Professional liability: Risks in an interconnected world

Transcription

1 Professional liability: Risks in an interconnected world

2 Business may be increasingly global, but claims remain local Professionals are working differently today, thanks to technology that connects them to information, clients and peers in ways few could have envisioned two decades ago. The notion of what is a profession is itself evolving, as the Internet enables people to deliver services remotely to clients around the world. The realm of professional services is no longer limited to traditional occupations such as accountants, architects, dentists, doctors, engineers and lawyers. Today, many different occupations are rendering advice and using tools and skills to assist clients with business and personal needs. As these shifts continue, courts and case law are catching up, slowly. In all professional services, whether traditional or newly emerging, there is risk of errors or omissions that lead to liability. In this environment, insurers have more opportunities than ever to underwrite a diverse set of professional liability risks. What insurers must remember, however, is that while a growing number of firms are conducting their businesses globally, claims continue to occur locally. A deep understanding of local laws and legal customs is crucially important to enable professionals and their insurers to achieve profitable growth. 2

3 Changing expectations heighten risk The more interconnected professionals become, the more exposed they are to wrongdoers. Global proliferation of connected devices not only has expanded the hours that many professionals keep, but it also has altered how they complete and deliver their work. According to the Pew Research Center, 77% of Americans owned smartphones in 2016, compared with 35% in Pew also found that nearly eight in 10 American adults own desktop or laptop computers, and 51% have tablet computers. A natural outgrowth of greater connectivity is access to data and immediacy of communications around the world, which for professionals is both a blessing and a curse, said Eric Moon, a partner at Clyde & Co in San Francisco specializing in professional liability for architects, engineers, lawyers and other professionals. This leads clients to expect quick responses and adds pressure to professionals who are already eager to demonstrate good service to respond right away. A desire to serve the client through rapid response to questions can expose professionals to E&O liability, if proper risk-mitigation procedures are not followed, he noted. The connected world additionally has turned many professionals into gatherers and analyzers of data, whether from clients or other sources, Moon said. Many insurers now expect on-demand access to account information and analysis. The ability to provide this service can enable professional firms to provide their clients with additional value, but it also can increase exposures ranging from E&O to data breach, he said. The more interconnected professionals become, the more exposed they are to wrongdoers, said Moon. There is increasing risk for law firms and other professional firms that handle large amounts of client data. Professionals increasingly are expected to aggregate and analyze information for clients. Nowadays, lawyers and other professionals are keepers of data as well as expertise, Moon said. The more available you make your files to clients, the more careful you have to be about protecting them. Protecting clients files has become even more important for professionals across the board. A new and troubling development is the frequency of attempts and growing sophistication by cyber criminals to access and misappropriate data. For lawyers, who have privileged information from their interactions with clients, data protection is crucial. Law firm general counsel and risk managers now regularly list data security as the top concern for their firms. 1

4 The E&O effect Client sends an to two contacts at two different professional service firms: See below and attached documents. Need answer ASAP. Let me know if you have questions. Professional 1, on vacation, sees the on phone and confirms to client he will handle it. Professional 2, in her office when she sees , asks client for deadline and upon receipt confirms she will handle it. He forwards to a junior professional in the office to handle. She sends the detailed information to an outside consultant for input. Path to an error Upon return a week later, Professional 1 sends the junior s response to the client. Client responds: I needed that ASAP! The deadline for me to act was last Friday. I thought you took care of it? The consultant analyzes the data and sends it back to professional. Professional 2 asks junior associate working from home to read the analysis and prepare document. Path to an omission Through Professional 1 s error, client missed a deadline and incurred a financial loss. Professional 2 quickly reads over the document and submits it on time. As confidential information is transferred, shared and housed on multiple servers and devices, an additional point of possible data breach is created. Client responds: I relied on your response to submit an important bid, but it was missing key data! Professional 2 s omission caused client to incur a financial loss. 2

5 But data breach, whether caused by malicious actors or unintentional acts, is not the only worry for professionals. An increase in ransomware attacks, which may not involve any theft of data, can halt a business in its tracks. Inability to access client data for even a short period can have severe consequences for professional firms, shutting down productivity and causing clients to lose confidence. A major ransomware attack known as Petya hit numerous firms in Europe in June 2017, including a global law firm. The law firm confirmed that its network services had been shut down by the malware and were restored a few days afterward. Most ransomware attacks, including Petya, are accompanied by a relatively low ransom demand, equivalent to a few hundred US dollars in Bitcoin or another cryptocurrency to remain anonymous. Such amounts are small enough that many organizations agree to pay the ransom, which cyber security experts contend encourages further attacks. Paying a ransom to unlock a computer system is no guarantee that hackers have not accessed or extracted data. As Clyde & Co Partner Joan D Ambrosio, who specializes in advising insurers on technology and media errors and omissions claims as well as data security, pointed out, some attackers are using ransomware to obscure other malicious activity. Professionals in every industry must remain mindful of the risk of data breach, a reality of doing business in an interconnected world. Professionals also must remain aware that laws differ regarding data privacy around the world. For example, the European Union s General Data Protection Regulation (GDPR), which takes effect in May 2018, applies to all organizations within or outside the EU that process data in selling goods and/ or services to citizens in EU countries. Professionals in the Americas who advise or work for EU clients therefore must prepare to comply with the GDPR. Professionals in every industry must remain mindful of the risk of data breach, a reality of doing business in an interconnected world. 3

6 Traditional & non-traditional professions 36.2% of American workers over age 25 who hold bachelor s degrees worked at home in Source: Bureau of Labor Statistics What is a profession? In common parlance and in the insurance industry, the idea of what constitutes professional services has changed dramatically over the past 20 or so years, said Scott Bertschi, a Clyde & Co partner based in Atlanta who focuses his practice on insurance coverage, professional liability defense and data breach response. In the 1970s, asking, What is a profession? would typically be answered with A doctor, lawyer, accountant or engineer. Nowadays, it can be much more. Staffing companies, title agents, trustees, web developers, real estate developers most people do not think about these as types of professions, he said. The question of what is a profession has evolved, agreed Kathryn Ashton, a Clyde & Co partner in San Francisco who specializes in appellate law and represents insurers in complex coverage litigation in areas including media and entertainment, and professional liability. The definition of a profession has become very broad and is no longer limited to traditional roles requiring a certain amount of education and training. Today, using a pierced-earring gun can be sufficient to be considered a professional service in certain circumstances. It is no longer uncommon to have professional liability insurance available for professions from trailer park managers to logistics companies handling transportation. There is increased risk when professionals are unaware of the potential liabilities related to their work. Select list of professionals Chefs & cooks Forest fire inspectors & prevention specialists Health technologists Home health aides Insurance agents Lifeguard, ski patrol & other recreational protective services workers Media & communication workers Occupational health & safety technicians Pharmacy technicians Police & sheriff s officers Property & real estate managers Real estate agents Secretaries & administrative assistants Security guards Surveying & mapping technicians Tax preparers Title examiners Transportation security screeners Travel & tour guides Tree trimmers & pruning workers Source: Bureau of Labor Statistics 4

7 Over the past 15 years, connectivity has given birth to the gig economy, in which workers perform services on a freelance or contracted basis, rather than as employees. Jobs involving material that can be delivered electronically for instance, media, entertainment, software development and various kinds of consulting are easily transacted by freelance workers. The Bureau of Labor Statistics (BLS) notes that employment surveys do not always clearly capture such workers, though the BLS acknowledges that non-employer job growth has occurred in every industry. For professional, scientific and technical workers, the number of professionals identifying themselves as non-employers between 2003 and 2013 grew by nearly 600,000. According to the BLS, 36.2% of American workers over age 25 who hold bachelor s degrees worked at home in At-home businesses have become a significant source of employment. What many of these proprietors fail to realize is, they may have access to and can benefit from professional liability insurance, Ashton said. The types of professional services for which insurance can be purchased continue to expand as the insurance industry creates new offerings to match risks created by a changing workforce, she added. Coverage issues have arisen from policy definitions of professional, but in keeping with the trend, the scope of coverage is generally broadening, Bertschi said. The definition of a profession has become very broad and is no longer limited to traditional roles requiring a certain amount of education and training. Non-employer business growth, ,282 - Other services* 738,694 - Administration, support, waste management and remediation services 588,195 - Professional, scientific and technical services 416,816 - Health care and social assistance 402,758 - Real estate, rental and leasing 368,548 - Arts, entertainment and recreation 243,315 - Transportation and warehousing *This sector includes repair and maintenance; personal and laundry services; and religious, grantmaking, civic, professional and similar organizations. Source: US Census Bureau 5

8 Common law slow to develop in emerging professions Looking at medicine or accountancy, why does the law impose obligations on these professions but not a software developer? We might find that the law just hasn t gotten around to it yet. One of the challenges in lawsuits alleging professional liability is that common law is still developing around the duty of care. Courts have long recognized a duty of care in tort for traditional professions. Claims against emerging professions are generally based on contractual duty a risk that insurance policies typically exclude. Some courts, however, have declined to apply this exclusion to those contractual obligations to perform the otherwise covered professional service. In Ironshore Specialty Ins. Co. v. 23andMe Inc., (Case No. 14-cv BLF; July 22, 2016), insured 23and Me sought coverage for class actions filed against it alleging breach of contract for providing a personal genome service including genetic information on ancestry as well as personal health traits. The litigation commenced after 23andMe ceased offering the personal health component, following a warning by the US Food and Drug Administration that the personal health component violated US law. The US District Court for the Northern District of California ruled that a contractual liability exclusion did not apply to the professional liability insuring agreement in 23andMe s policy. The court said that if it adopted Ironshore s construction of the contractual liability exclusion, virtually all claims relating to 23andMe s professional services would be excluded. Ironshore s construction of the exclusion would appear to defeat the professional liability coverage for which 23andMe bargained. The judicial system does evolve and change, Bertschi pointed out. Fifty years from now, will courts impose common law obligations on software implementers? Looking at medicine or accountancy, why does the law impose obligations on these professions but not a software developer? We might find that the law just hasn t gotten around to it yet, he explained. In a service economy, more obligations arise out of contract instead of tort law, Bertschi noted. Insurers want to cover fortuitous events that cause consequential damages. They also need to balance the benefit of the bargain in offering coverage. Insurers can write a policy that draws a hard line, but that might not be marketable. In both law and insurance, evolution is taking place, but it s a slow process, Bertschi said. The law is developing as technology continues to evolve, and is changing from state to state, agreed Ashton. An industry that has been significantly influenced by the evolution of technology is media and entertainment and what it means to create content. In 1996, Congress enacted the Communications Decency Act in an effort to regulate dissemination of obscene or indecent content to children. Section 230(c)(1) of the Act states, [n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of 6

9 any information provided by another information content provider. Section 230 purports to provide protection against all liability, civil and criminal, except liability under federal criminal law and intellectual property law. The scope of the immunity provision, however, continues to be a topic of debate in courts around the country. For example, the 9th US Circuit Court of Appeals ruled in a 2008 case that a website operator who edits user-generated content retains his immunity for any illegality in the user-created content, provided that the edits are unrelated to the illegality. However, a website operator who edits in a manner that contributes to the alleged illegality is directly involved in the alleged illegality and thus not immune. (Fair Hous. Council of San Fernando Valley v. Roommates.com, 521 F.3d 1157 (2008)), emphasis added. In 2015, the Supreme Court of Washington took the 9th Circuit decision to find that a provider of online classifieds may not be within the immunity of Section 230, if it was found to have materially contributed to content provided on its website. The 1st US Circuit Court of Appeals, by contrast, held that the same provider was entitled to immunity under the statute. As these opinions show, the courts are still trying to define the creation of content and what is neutral posting vs. a material contributor to content posted on the Internet, Ashton said. 7

10 Cross-jurisdictional claims Many professional liability policies are issued on a worldwide basis, creating the potential for exposure in those countries where the insured provides its services. The Internet is a double-edged sword for professionals. It facilitates worldwide sharing of content, but it also complicates matters for professionals in terms of recognizing and complying with different jurisdictional rules. For example, a blockbuster film released internationally may trigger claims of copyright infringement for the story or a musical composition in the film requiring analysis under the law in multiple jurisdictions. A US broadcast network may find itself sued under the civil laws in one country and under the penal code in another, for the same exact content disseminated in multiple locations. The potential exposures that can arise from insuring content and its dissemination in the Americas, may be drastically different from the potential exposures arising when the same content is disseminated globally, Ashton said. Similarly, North American businesses are accustomed to resolving conflicts through the civil court system. Elsewhere in the world, however, professionals may face arrest and criminal charges. It is not uncommon in the Middle East and parts of Asia for a design professional to be jailed for an error that results in property damage or personal injury. In Qatar, heavy rains in 2015 flooded a newly built airport in Doha. In response, the government banned contractors and consulting engineers from leaving the country pending an investigation. Many professional liability policies are issued on a worldwide basis, creating the potential for exposure in those countries where the insured provides its services, pointed out Ashton. There is a great need for local expertise in crossjurisdictional claims. Another professional liability exposure arising from global connectivity is the ability to deliver advice across the world. Licensing and certifications typically are subject to borders, whether state or national. Professionals need to be aware of licensing requirements and exercise caution not to overstate their expertise in different geographic areas, Moon said. Local expertise, with on-the-ground experience, is valuable in all professions, and especially law, he noted. In every jurisdiction, there are local nuances that professionals need to know. As the nature of professional services continues to evolve and connectivity grows around the world, professionals and their insurers must remain watchful of emerging trends in errors and omissions liability. Consulting with experienced counsel to mitigate E&O risks and provide support when claims arise is strongly advised. Professionals will become further connected in the future, not only to new and existing clients but also to risks. 8

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