How Professional Liability Insurance Works
As a business owner or professional, you strive to always provide the best services for your clients. But no matter how careful you are or how long you’ve been in the business, mistakes happen. And if a customer suffers a financial loss, they may sue your business, whether or not you are truly at fault. Even if you win the lawsuit, dealing with expensive litigation can deal a serious blow to your business, especially for smaller companies with fewer resources.
That’s where professional liability insurance can help. It’s the financial cushion you need to weather unexpected claims—so you don’t have to pay expensive legal defense costs out of pocket.
So what can you expect from professional liability insurance? Stay tuned as we cover it all, from how it works and what it covers to the factors that determine how much you’ll pay.
What is Professional Liability Insurance?
If you’re an expert in a specific field—such as an accountant, lawyer, consultant, or physician—you know that your services can lead to mistakes that can cause financial or indirect loss for your clients. But general liability insurance doesn’t cover claims of professional negligence, error, or omission. And that’s where professional liability insurance comes in.
This type of coverage, also known as errors and omissions insurance, protects your business if your client claims financial damages from the professional service that you provide. It helps you pay the defense costs and judgments that come from claims of professional negligence, error, or omission.
What Does Professional Liability Insurance Cover?
It’s an unfortunate reality that there are plenty of reasons why a client may decide to file a lawsuit against your business—whether or not you’re responsible. But professional liability insurance protects your business against those claims. It’s designed to cover legal and settlement costs, regardless of whether an error was made. Professional liability insurance typically covers the following claims:
- Work errors or mistakes: Even a simple mistake can cause one of your clients to lose money—and it may cause them to sue you.
- Example: Someone at your accounting firm incorrectly enters a company’s financial transactions or makes a mistake when filing their taxes, leading to a loss of money. If the client sues for damages, your policy would cover the cost of litigation costs.
- Undelivered services: If you have promised that you will deliver a service in a certain way and fail to do so, your client may sue—especially if the failure to live up to expectations negatively affects their finances.
- Example: Let’s say you’re a management consultant who is guaranteed to increase a company’s profits by 30% by an agreed-upon date. If profits haven’t improved by 30% by that date and the company sues, your insurance would cover the legal defense costs.
- Actual or alleged negligence: If your business is accused of negligence—for instance, on the grounds your work did not meet industry standards—you may face a professional liability lawsuit.
- Example: If a patient at your clinic or hospital claims that they were injured as a result of your misdiagnosis or surgery error, your insurance would cover the cost of the eventual settlement.
- Failure to provide services by an agreed-upon time: Missed deadlines happen to everyone—but as a professional, if it impacts a client’s bottom line, you may be held responsible.
- Example: If you miss a filing deadline for your client’s tax return and your client is hit with a fine from the IRS, you may be sued to recoup the expenses. However, professional liability insurance will cover the cost of hiring a lawyer, in addition to the settlement payout.
- Breach of contract: If a customer or client accuses you of failing to fulfill your contractual obligations, you may end up in legal trouble.
- Example: If you failed to make a payment on time to a client, you could face a breach of contract lawsuit. Thankfully, insurance coverage can protect your business from client lawsuits over an actual or alleged breach. However, it’s important to know that professional liability insurance is a claims-made policy, so it only covers breach of contract claims that occur while your policy is in force. That’s why it’s critical that you maintain continuous coverage for maximum protection.
What Does Professional Liability Insurance Not Cover?
Although professional liability insurance provides coverage for workplace negligent mistakes and oversights, it doesn’t cover everything. For example, it won’t help your business with these kinds of claims:
- Bodily injury: If a client were to trip in your office and suffers a broken bone, it would be covered by general liability insurance. However, professional liability does typically cover bodily injury for healthcare professionals, engineers and architects.
- Property damage: For most professions, third-party property damage is not covered by professional liability insurance. For example, if a customer’s files are destroyed in a fire, it would fall under general liability. However, professional liability does typically cover property damage if you are an architect or engineer.
- Employee discrimination: If an employee files a lawsuit citing discrimination—for example, for wrongful termination or workplace harassment—it won’t be covered by professional liability coverage. Instead, it will need to be covered by employment practices liability insurance
- Employee injury: If your employees get hurt or sick from their job, you’ll need a worker’s compensation insurance policy to help them recover and return to work.
- Personal and advertising injury: This includes things like slander, libel, publications that violate privacy, copyright infringement, false arrest, wrongful eviction, and malicious prosecution. If your business is sued for any one of these instances, it will typically be covered by general liability.
- Data breach: If your company loses confidential or sensitive information about your clients and customers, you’ll need cyber insurance to provide coverage.
In order for a professional liability policy to pay out, it must be in place at the time a claim is filed. You may be able to purchase additional coverage for a set period of time before the policy start date. But if you let your coverage lapse, you’ll lose protection for your business.
Do I Need Professional Liability Insurance?
Some industries are legally required to carry professional liability insurance. For example, healthcare professionals need medical malpractice insurance, which is a type of professional liability. Whether or not you’re required to have it by law, professional liability insurance is a must-have to protect you from client lawsuits.
Additionally, your clients may require it before they’ll agree to do business with you. They’ll want reassurance that they’re protected if your company fails to deliver on promises or breaks the terms of your contract. If any of the following apply to your business, you should strongly consider carrying a professional liability insurance policy:
- You offer professional services directly to customers
- You have to sign a contract that requires you to carry coverage
- You regularly give advice to your clients
Some examples of businesses that should carry professional liability insurance include:
- Lawyers or law firms
- Accountants or auditors
- Home inspectors
- Insurance professionals
- Real estate agents and brokers
How Factors Affect Costs of Professional Liability Insurance?
The cost of professional liability insurance varies from one business to another. Some of the factors that can affect how much you’ll pay include:
- Type of business: Professionals in certain industries, like construction, will face more risks and may pay more for coverage as a result.
- Policy limits: If you want a policy that pays out more per incident or per year, you’ll need to increase your coverage amount—which means you’ll pay a higher rate.
- Years in business: Businesses that have been around longer tend to pay a lower rate than newer ones.
- Location: Is your business located in an area that’s at high risk for vandalism or damage from earthquakes or flooding? If so, you should expect to pay more.
- Claims history: If you’ve made claims in the past, you’ll be flagged as a higher risk to insurers, which will increase your monthly premium.
Protect Your Business’ Future with Professional Liability
A professional liability insurance policy gives you peace of mind for your business—and choosing one doesn’t have to be expensive or stressful. We make shopping for insurance simple, with our fast and affordable free online business insurance quotes. Best of all, we offer the lowest coverage rates in the industry. Get your quote and join the rest of the business owners who are saving on their insurance every month!