What Does Professional Liability Insurance Cover?
Some people endure a setback and immediately look for someone to blame. And if you’re a physician, attorney, accountant, real estate broker or anyone who served as a consultant to such a person, they’re likely to point the first finger at you, and perhaps even file a lawsuit against you. That’s where professional liability insurance comes to the rescue.
Most conventional insurance policies cover a broad scope of tangible claims based in physical evidence, such as bodily injury, property damage, and defective products. Professional liability insurance, on the other hand, covers intangible claims based in verbal exchanges, namely consulting, as well as tangible claims, such as bodily injury. So, what does professional liability insurance cover? Read on to find out.
What is Professional Liability?
Simply put, professional liability is the claim that a client suffered insurmountable damage as the direct result of a professional failing to meet their industry’s “standard of care.” Or, more specifically, committing an action in which they:
- Provided the client with false or inaccurate advice or information
- Were negligent either in completing a task the client hired them to do or in making the client aware of compromising information
- Misrepresented facts, or violated good faith and fair dealing in the handling of a contract with the client
- Failed to prioritize the client’s best interests
- Failed to exercise the due diligence and skill the client expected of them based on their qualifications
In most industries, professional liability is referred to as errors and omissions. This is because, generally speaking, professional liability entails a professional jeopardizing their client in one of two ways: either by making a costly error in the execution of a service, or by committing an omission in failing to deliver on a promised service.
The exception is the medical field, in which professional liability is referred to as malpractice.
Why Professional Liability Insurance is so Important to Have
No matter what your industry calls it, the cost of a professional liability lawsuit is immense. According to research conducted by the National Center for State Courts, the average cost to cover client damages in an E&O lawsuit is over $140,500. And that doesn’t include the boatload of legal fees. Meanwhile, medical malpractice lawsuits are even harsher on the wallet, as the average cost checks in at a whopping $300,000 before legal fees set in.
Needless to say, getting hit with a professional liability lawsuit is at best a severe setback for your business and at worst a doomsday scenario it might not survive. Unfortunately, such lawsuits can be difficult for your business to elude. For several reasons, some of which are out of your control, professional businesses are a playground for common workplace mistakes, such as:
- Missed Deadlines – If one of your employees or a third-party vendor you outsourced work to is consistently missing deadlines, then guess what? In your client’s eyes, you’re the one who’s missing the deadlines
- Misplaced Files – Most businesses regularly deal with legal documents. This greatly increases the chances of you or one of your employees misplacing important paperwork
- Miscommunication – It’s likely that your area of expertise involves “inside baseball” that you don’t even realize is sailing right over your client’s head when you meet with them. Plus, the reason your client probably came to you in the first place is that your knowledge of your industry far exceeds theirs. Both of these factors lend themselves to you and your client struggling to stay on the same page, and your client having unrealistic expectations
- Overconfidence – Hopefully, your business is one that you’re enthusiastic about and that you’ve set lofty goals for. If so, that’s great, but it can also cloud your ability to remain objective when making predictions about your business. And if you make an overly ambitious promise to a client that you end up being unable to deliver on—even if you did so with the best of intentions—it may result in an E&O lawsuit
With so many clear pathways to the courtroom in play, it’s vital to have professional liability insurance coverage that protects your wallet. In the event of Unintentional Negligence, it’s in your best interest to have professional liability insurance coverage that protects your wallet.
Industries in Which Professional Liability Insurance is Particularly Useful
Depending on the nature of your business and the region you operate out of, professional liability insurance may or may not be required by your state. But for anyone working in an industry where the potential for workplace mistakes is as grand as the margin for error is slim, having a professional liability insurance policy is a must.
The mere act of offering professional advice, even if you’re great at what you do, automatically makes you a prime target for customers complaining about and questioning your expertise, which oftentimes takes on the form of a lawsuit. That’s why a professional liability policy is tailor-made for industries such as:
- Medical – For practicing medical professionals (doctors, nurses, physical rehab specialists, therapists, counselors, etc.), the stakes couldn’t be any higher. Every day, your customers quite literally put their lives in your hands. Because bad medical advice can lead to wrongful diagnosis, negligence, or permanent and even fatal damage, most states require practicing medical professionals to have malpractice insurance
- Legal – Each of the 50 states require practicing attorneys to carry professional liability insurance, and it’s easy to understand why. Oftentimes, an attorney’s ability to perform their job proves to be the make-or-break difference between a client sleeping at home and sleeping in a jail cell. Plus, legal counsel falls under the category of professions in which you can perform your job outstandingly well and still end up with a dissatisfied client. Even Dean Strang and Jerry Buting, attorneys who became household names for their dynamic defense of murder trial defendant Steven Avery in the Netflix documentary Making a Murderer, were ultimately sued by Avery for E&O
- Finance – Nothing fluctuates quite like the stock market. For financial advisers, that means the same finance tip that has your client in the green today could just as easily put them in the black tomorrow, and land a lawsuit on your desk shortly thereafter
- Accounting – Every April, people hire accountants to file their taxes for them because they don’t want to deal with the endless paperwork and mind-numbing number-crunching it entails. With so many numbers, sensitive documents, and legal mumbo jumbo on the table, it leaves the door wide open for slight oversights that can put your clients in big trouble with the IRS, and by extension, put you in big trouble with your client
- Architecture and General Contracting – The designing and building of a structure is a tremendously complex process. And yet, it’s a task people simply expect to get done without a hitch. It’s also a task in which there’s zero margin for error. Even the slightest mistake on your end—or on the party of a third-party vendor you outsource work to—can lead to catastrophic damage. It can also result in an E&O lawsuit that gouges you for costs associated with repair, economic loss, and pollution liability
- Real Estate – Being a real estate broker is all about making people fall in love with a property, warts and all. This can make you prone to overselling the property in ways it can’t live up to
Other professions that are poised to benefit from purchasing professional liability insurance include:
- Web and software designers
- Artists and creative professionals
How Does Professional Liability Insurance Work?
Professional liability insurance policies are typically constructed on a claims-made basis. This means that coverage only applies to claims made during the policy period. A select number of business insurance providers, however, set a retroactive date on professional liability insurance plans to cover incidents occurring before the insurance policy was activated.
It’s also important to note that most professional liability insurance policies are marked by shrinking limits. So, unlike general liability insurance policies that cover both your legal fees and your policy limits, your payment of defense costs through your professional liability insurance plan may reduce your available policy limit.
How is Pricing for Professional Liability Insurance Determined?
While annual professional liability insurance cost can surpass the $1,000 marker, some business insurance coverage providers can meet your needs for $600 or less.
The final cost of your policy is determined by two main factors:
The Policy Limit You Choose
When you purchase a professional liability insurance policy, it will come with the following two limits:
- Occurrence Limit: The maximum amount that the business insurance provider will pay for any one isolated claim
- Aggregate Limit: The maximum amount that the provider will pay for all combined claims during the policy’s “lifetime,” which is usually set for one year
Naturally, the higher your occurrence and aggregate limits are, the more your plan will cost. A vast majority of small businesses opt for a $1 million occurrence limit/$1 million aggregate limit plan.
The Industry You’re in
Your professional liability insurance policy quote will also be influenced by your insurance provider’s perceived risk of your business’s industry. For each industry, insurance providers assess what types of mistakes could occur, and how disastrous the mistake could be.
For example, policy costs for architects and engineers tend to be much higher than those of, say, accountants. Whereas a design flaw in a building could result in people dying, a miscalculated entry on a tax return doesn’t lead to anything much worse than an angry letter from the IRS.
Additional Notes on Professional Liability Insurance Policy Costs
In addition to your liability policy limit and the industry your business participates in, insurance providers will also evaluate:
- Where your premises are located
- The current condition of your premises
- Your qualifications as an industry professional
- Your personal claims history
- The number of employees at your premises
- Your business’s revenues
What Doesn’t Professional Liability Insurance Cover?
Lest you think that professional liability insurance gives you a carte blanche for exercising negligence, there are several instances that a professional liability insurance plan won’t cover. Such events include:
- Illegal Acts – This may seem like an obvious one, but it’s likelier to happen than you might think. Because so many consulting-based industries are built upon highly specific principles and protocol, it’s possible you or one of your employees could commit an illegal act as the result of an honest mistake or misunderstanding
- Intentional Wrongdoing – Another obvious one. But again, people do make mistakes. And when you’re dealing with a particularly irritating client, the thought of sabotaging them with intentional wrongdoing can be a tempting one
- General Liabilities – Just because your business is rooted in verbal consulting suggestion: If your business happens to be rooted in a professional, consulting-based industry, this doesn’t mean that you’re only vulnerable to professional lawsuits or that your premises are immune to slip-and-fall accidents. Let’s say a customer trips on your building’s staircase or sustains a bodily injury on your premises. This lands outside the realm of professional liability coverage, and must instead be covered by a general liability insurance policy. On a similar note, if one of your employees gets hurt in your office, this is covered by the workers’ compensation insurance plan, which all businesses are required to purchase by law
- False Advertising – While professional liability insurance can protect you from claims that you misrepresented important facts, it doesn’t extend to cover skewing facts about yourself or your business. If you’re accused of attempting to attract more customers by lying about your education, your business’s industry rankings, or anything that embellishes your qualifications, you won’t be protected
As the adage goes, “the customer is always right.” Unfortunately, this also rings true of professional business clients. Any client of yours, no matter how frivolous the reason for their dissatisfaction, can cry wolf on an E&O claim, take you to court, and regardless of the outcome, leave you with detrimental legal fees.
Though many E&O lawsuits end up being filed for reasons out of your control, protecting your business’s assets from the associated legal costs is a measure you can take into your own hands thanks to the expansive coverage that professional liability insurance offers.
Call our expert insurance agents at NOW Insurance to help you customize the perfect liability coverage plan today. You don’t want to continue forward without this shield, as a stray arrow can strike at any time.
- “Professional Liability Insurance” by Julia Kagan
- “Caseload Highlights: Examing the Work of State Courts, Vol. 11, No. 1 by Robert C. LaFountain https://cdm16501.contentdm.oclc.org/digital/collection/civil/id/24