Professional liability

Professional liability (전문가책임) is a kind of tort liability which professional advice- and service-providing individuals and companies assume as a result of willful or negligent performance of their profession. So the claim based on professional liability is usually made by an affected client, and damages are awarded in a civil lawsuit. It includes alleged failure to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the professional.

Key words
professional liability, profession, credit rating agency (CRA), professional liability insurance (PLI), errors & omissions (E&O)

Types of Profession
In a legal sense, professionals are required to pay higher standard of duty of care than an ordinary person. So professional liability is interpreted as graver than professional negligence. Accordingly, this kind of profession calls for:
 * Awarding license to perform the profession;
 * Long-term education or training, and continuing education for the profession;
 * Self-regulation by the professionals' association;
 * Respect of independent and discretional practices of profession; and
 * Non-for profit or public nature of professional practices in most cases.

In view of the above requirements, medical doctors, lawyers and public accountants are regarded as "full professional" while judicial scriveners (법무사), tax accountants (세무사), appraisal specialists (감정평가사), etc. are called "semi professionals".

Recently the professional liability by the credit rating agencies has been the hot issue in legal terms. In the course of global financial crisis in 2007 to 2008, the credit rating agencies (CRAs) have been criticized for their erratic credit rating practices. Legislation for strict regulation on the responsibility and even the methodologies of CRAs was discussed in some countries as well as in such global fora as G20 Initiative.

In case of CRAs
It is a generally accepted practice regardless of individual or institutional investors to refer to the credit ratings on a number of candidate securities in the capital market. If the securities carry an investment grade, investors are willing to believe there would be a little chance of default to maturity. If not, he will go to law against the credit rating agency for a wrongful rating. So the credit rating agencies make it a rule to remind clients of the caution that the rating on the bonds, commercial papers and other securities is provided only for reference to investment, and does not guarantee the repayment nor solicit the investment of those securities.

However, the Act on the Protection and Use of the Credit Information requires the credit rating agency to take into account the financial status, business operations, various risks involved and other projections of the applicant in a comprehensive manner, and prevents the professional house from conducting credit rating intentionally or out of gross negligence to cause a material loss to investors of those securities. If the forbidden things happen, the company might be subject to the suspension of business or revocation of business authorization, and even the penal punishment.

Further, the agency should compensate the damages to the client in case of its fault. On the other hand, the Capital Markets Act sets forth that any misrepresentation in the prospectus with respect to the securities or the issuer, which inflicted a loss to investors, shall hold the credit rating agency, that has certified the contents of the prospectus, responsible for the damages.

However, the professional liability concerning securities was to be borne by certified public accountants or certified assessors before credit rating agencies were included in the professionals responsible for the erroneous prospectus statements in April 1999 when the amendment to the Securities Transaction Act came into force. It is quite contrary to the situation in the United States.

How about Information Age Experts?
These days the so-called “information age experts” have hard times in on-line/off-line world. It’s because those experts who produce various information, or collect, distribute such data in the Cyberspace are often to blame since common people get to know in-depth information and are sensitive to such errors as committed by such experts.

Then who is an information age expert? Conventionally, professionals refer to medical doctors, dentists, accountants, appraisers, credit rating agencies and so on. Recently such experts as power bloggers, popular twitterians, regular Internet bulletin commentators belong to a new generation specialist group. Even though they don’t have qualified licenses, no one doubts their influence over the Internet users because the effect of their conducts is swift as light-speed, direct as specialists, and widespread as nationwide or worldwide.

What is the quasi-professional liability of the above-mentioned bloggers, twitterians and on-line reviewers? As for the new generation of professionals, their specialty and reputation have been accumulated by means of widespread and positive responses as denoted by page views and affirmative replies even though there is no certified public license. Such kind of license may be replaceable by the number of page views or on-line visitors.

The example is the famous “Minerva case” in the year-end of 2008. In the midst of global financial crises, the influence of Minerva’s critical comments were so huge and unpredictable that the public prosecutors accused him of immeasurable damage to public interest, i.e., the stability of nation’s economy via the electrical communication facilities, or the Internet. Later he was acquitted in that his comments were a mere kind of speech to be protected by the Constitution, and the provision of the Framework Act on Electric Communications was declared unconstitutional by the Constitutional Court in December 2010.

Then what is the responsibility to be borne by these new generation experts? It might be, among others, technical measures for the prevention of further damage, take-down of the controversial content at issue, timely warning notices to users, etc. rather than tort liability for damages.

In the United States
The Securities Act of 1933 and SEC Rule 436 exempt the credit agency from damages for the reason that a credit rating does not constitute a part of the prospectus. Nowadays the function of the credit rating agency is increasingly important in the capital market. If the agency is held heavily responsible for its rating, then the investors might be protected from the erroneous credit rating. But a few rating company would survive highly changeable capital market. Otherwise, on the contrary, the professional house would go too far without a sense of responsibility.

Legal Nature
It is useful to discuss the legal nature of the responsibility of the credit rating agency. Its responsibility to pay for loss or damages inflicted on investors is believed to derive from the provisions of law, breach of contract, professional negligence, or the explicit or implied warranty with regard to the credit rating itself. At the same time, it should be noted that the U.S. court ruled the credit rating report is protected under the actual malice standard set out in a series of the U.S. Supreme Court decisions.

The freedom of expression is interpreted into a principle that a publisher does not incur liability for a false statement unless the statement was made with actual malice, i.e., with knowledge that the statement was false or with reckless disregard for whether or not it was true.

Professional Liability Insurance (PLI)
PLI is devised to protect professionals from lawsuits from their clients. It is also called professional indemnity insurance (PII), But PLI is more commonly known as errors and omissions (E&O) in the United States.