What Is Professional Liability Insurance?
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Professional liability insurance, also called errors and omissions insurance, is a type of insurance that protects professionals from financial losses due to claims of negligence or failure to perform their professional duties. Often purchased by professionals, such as doctors, lawyers, accountants, and architects, as well as consultants, contractors, and other service providers, professional liability insurance will pay for attorney fees, settlements, and judgments, up to the limits of the policy. Without professional liability insurance, professionals would pay for these costs out of pocket.
What Does Professional Liability Insurance Cover?
A type of commercial insurance, professional liability insurance typically covers financial losses that result from claims related to the rendering of professional services, such as consulting, legal counsel or financial advice. These claims may include:
- Breach of contract
- Intellectual property infringement
Here are some examples of claims that former clients may file against a professional:
- An accountant’s clerical error resulted in loss of thousands of dollars
- A doctor provided incorrect treatment
- A general contractor built their home incorrectly
- A consultant's advice caused financial loss
- A catering service arrived late for their wedding
These claims often lead to lawsuits. Professional liability insurance will pay for your legal fees, including attorney fees, court costs, settlements and judgments.
What Isn’t Covered by Professional Liability?
Professional liability insurance typically does not cover damages that result from intentional criminal acts, including deliberate fraud or misconduct. It also does not cover general liability claims, such as property damage or personal injury, or employee injuries or illnesses sustained in the workplace (see workers’ compensation insurance).
Additionally, the policy may have exclusions, such as not covering losses caused by certain types of technology or certain types of litigation. For example, you may not be covered if your systems were hacked and your client’s sensitive information was stolen — this would be covered by commercial cyber insurance.
It is important for professionals to carefully review their insurance policies and understand the specific types of claims that are not covered, to be fully aware of their potential liabilities and make informed decisions about their insurance coverage.
How Professional Liability Insurance Works
When a claim is made against a professional, the insurance company will investigate the claim to determine if it is a covered loss. If the claim is covered, the insurance company will provide a legal team to defend the professional and will cover any settlements or judgments that may result from the lawsuit, up to the limits of the policy. The coverage typically includes legal defense costs, settlements and judgments, up to the policy limits.
Professional Liability Insurance Example
A consulting firm is sued by a client who claims that the firm's advice led to significant financial losses. The firm's professional liability insurance policy would cover the cost of the legal defense and any settlements or judgments that result from the lawsuit, up to the policy limits. This protection would help the firm to manage the financial risks associated with the lawsuit and to protect their personal assets.
Is Professional Liability Insurance Required?
Whether or not you are required to have errors and omissions insurance depends on the type of business you have and where it is located. Clients or contracts may require it as a condition of doing business. As an example, in certain states, real estate agents are mandated to obtain E&O insurance as a condition of obtaining their real estate license.
How Much Does Professional Liability Insurance Cost?
According to The Hartford, the cost of professional liability insurance may range from $500 to $1,000 per employee. For example, a consulting firm with 100 employees may pay $50,000 to $100,000 annually ($4,167 to $8,333 per month). Actual rates will vary and typically consider the factors that affect the business’s liability exposure, such as:
- Business size
- Level of employee training
- Terms of existing contracts
- Coverage limits desired
- Annual revenue
What Types of Professional Liability Insurance Are There?
There are two types of professional liability insurance: claims-made and occurrence-based. A claims-made policy provides coverage for claims that are made during the policy period, regardless of when the alleged loss occurred. An occurrence-based policy provides coverage for incidents that occur during the policy period, regardless of when the claim is made.
To distinguish each type, let’s use the following scenario: You are a marketing consultant and work with a client on March 1 on a marketing campaign. On June 25, the client was dissatisfied with the results of the campaign and sued you for failing to meet revenue goals you allegedly promised. You file a claim on July 10 with your insurance company to cover your defense costs.
Now, let’s assume there is a claims-made policy and an occurrence-based policy. Both have policy periods from January 1 to June 30.
For the claims-made policy, your insurance company would not cover you because it was made outside the policy period. The policy ended on June 30 and you waited until July 10 to file a claim. If you filed a claim between June 25 (when they learned of the alleged loss) and June 30, you would have been covered.
For the occurrence-based policy, your insurance company would cover you because the alleged loss occurred within the policy period even if you filed a claim after the policy term expired. You provided advice to the client in March and they notified you of the loss in June.
Who Is Professional Liability Insurance Best For?
Professional liability insurance is best suited for professionals who may be held liable for damages or losses resulting from their services and must uphold some contractual obligation. This type of insurance is important for these professionals as it helps them to manage the financial risks associated with their work and to protect their personal assets in the event of a lawsuit. After all, even seasoned professionals are prone to making mistakes.
Here are a few examples of professionals who may benefit from professional liability insurance:
- Doctors and healthcare providers
- Lawyers and legal professionals
- Accountants and financial advisors
- Architects and engineers
- Business consultants
- IT professionals and software developers
- Real estate agents and brokers
- Insurance agents and brokers
- Marketing and advertising professionals
- Personal trainers
- Physical therapists
- Family and health counselors
Professional liability insurance may hold less importance for products-focused businesses, such as an ecommerce store selling custom-print t-shirts. Product liability insurance would likely hold greater importance for these types of businesses.
Professional Liability vs. General Liability
With the exception of personal and advertising injury, general liability covers losses that are primarily physical: injuries or property damages for which your company can be held liable. On the other hand, professional liability covers losses specifically related to the rendering of professional services, such as negligence or omissions.
To demonstrate the differences, let’s use an example of a small accounting boutique that holds both general liability and professional liability insurance.
- If a client visits the office and trips on a rug and breaks their elbow, then the company’s general liability insurance would pay for their medical bills.
- If the company makes a clerical error, resulting in thousands of dollars in losses, then the company’s professional liability insurance would cover those losses plus legal defense costs if the company was sued.