Professional Liability Insurance
Embroker helps business owners get the right professional liability insurance to properly protect your business from civil lawsuits for negligence, common mistakes, malpractice, misrepresentation claims, and more.
Professional liability insurance, also commonly referred to as errors & omissions insurance (E&O) or malpractice insurance, is a type of insurance policy that can protect your business from claims related to malpractice, errors, omissions, negligence, and more during the course of providing a professional service.
Professional liability is usually issued on a claims-made basis. Unlike a property policy, this means that you must report claims when you become aware of them. The claim attaches to the active policy when the matter is reported, so long as the incident occurred after your Prior Acts Date.
The Prior Acts Date is typically the first date you started buying professional liability insurance, which is why it is imperative to keep buying the coverage, or you risk losing protection for your prior acts and liabilities.
We wrote this guide to help you, the reader, understand both the basics of professional liability insurance as well as some more advanced considerations. Our hope is that you walk away from this article a more empowered buyer, with a better understanding of the risk you can transfer to other parties via the professional liability product.
We’ve quickly become a leading Professional Liability / E&O insurance broker for law firms, accounting firms and high growth businesses. If you’d like help, we’d invite you to talk with a broker or get started by creating an Embroker account.
What Is Professional Liability Insurance?
Professional liability insurance goes by different names in various professional circles, including professional indemnity, malpractice, or errors and omissions (E&O). They all refer to insurance that keeps you and your company protected from civil lawsuits for negligence, common mistakes, misrepresentation claims, and more. Professional liability insurance is typically the first policy purchased by anyone providing professional services (lawyers, accountants, consultants, etc.) as they realize these claims can be among the most expensive.
If you already have general liability insurance, you may think that you don’t need professional liability coverage. However, many liability policies only cover bodily injury, personal injury or property damage, so the most likely of claims (i.e. those related to your services) do not fall under the GL umbrella.
For example, professional liability can cover you if a customer chooses to file a claim against you related to a service that you either failed to provide entirely or sufficiently. To clarify, if a service you performed did not have the expected or reasonable results in the eyes of your client, you could be sued.
In the medical and healthcare industry, when talking about doctors, chiropractors, dentists, and nurses, this type of insurance is often called malpractice insurance.
A good E&O policy will be able to cover all of the costs of your defense, as well as your judgments or settlements.
Who Needs Professional Liability Insurance Coverage?
Professional liability insurance is particularly useful for any business that offers professional services, such as lawyers, accountants, consultants, investment advisors, real estate agents, architects, medical experts, engineers, and others.
These professions require specialized education or training, and their practice must meet certain state, industry, contract, or client standards. Oftentimes, the professional is licensed for their trade. Compromised standards or not living up to the standard of care can lead to expensive legal defense costs or even litigation which will put your company assets at risk and can even endanger your personal assets.
Really, any small business or large corporation that is providing a service to a client for a fee should look into E&O coverage, whether you’re a dentist, a beautician or a wedding planner.
What is the material impact my services have on my clients and what if I make a mistake or upset a client?
Are my clients ever at risk of monetary damages if I make a mistake or give bad advice?
Is there a lot of variation in the services I provide from person to person?
Do I ever make suggestions or claims that could be construed incorrectly?
If you’re answering “yes” to these questions, you should have a professional liability policy.
Why Do Businesses Need Errors & Omissions Insurance?
No matter how good you are at doing your job and how long you have been doing it, you are bound to make a mistake every now and then or have a disgruntled client. E&O coverage protects you in the case that you do make a mistake that a customer decides to sue you over.
For example, if your client in Springfield, Massachusetts needed important products shipped to him for the grand opening of his store, but your company shipped them to Springfield, Illinois instead, you can expect a lawsuit from that customer.
In some instances, E&O claims aren’t even related to money. A claim can be made for less tangible issues, such as loss of reputation or emotional distress.
What Professional Liability Claims Look Like
Nobody expects to make a mistake, but they happen. In business, it’s smart to expect mistakes and protect yourself from professional liability lawsuits that can result from them. Whether a lawsuit is grounded or not, liability damages can cost you money, time, energy, and perhaps most importantly, your reputation.
Negligence and misrepresentation claims that fall under professional liability are very broad in spectrum. Any situation that involves an individual or corporation breaching its duty and causing injury and/or financial loss can be considered negligence.
Sometimes it can be as simple as miscommunicated results, a missed deadline, a misinterpretation of a law, or an error in paperwork. Malpractice allegations can also arise from changes in your clients that are out of your control. In fact, even if you’ve done the work to spec without mistakes, you can still be sued if your work doesn’t meet a client’s personal standards or expectations.
For example, lawyers and accountants provide counsel, opinions, and management to clients in sensitive positions. Even if their legal or financial advice is sound — and given with the client’s best interests in mind — they may face claims of misrepresentation, poor counsel, or negligence (also known as malpractice).
A client may say certain advice led them to a bad business decision or caused them to invest poorly. These claims are often easy for a plaintiff’s attorney to craft and may be hard to escape. Regardless of the claims validity, it will require legal representation and take a great deal of precious time and financial resources to resolve.
You need professional liability coverage because these types of issues are all too common and are not covered by your general liability policy. Going without professional liability insurance is a risk that you have no sensible reason to take.
What Does a Professional Liability Insurance Policy Cover?
What is most important to take into consideration when discussing what an E&O policy covers, is that these errors and omissions need to be unintentional in order for the insurance to pay claims on the policy.
Some of the unintentional acts of negligence that E&O insurance covers include:
Bad advice: When a client loses money or suffers other damages as a result of taking advice from you that proved to be detrimental to them.
Misrepresentation: When you promise to deliver a product or service in a certain way or at a certain time and you don’t follow through with that promise.
Violating good faith: Any act that includes a failure to communicate or the withholding of vital information and general noncooperation.
Copyright infringement: Some E&O policies can protect you if you have unintentionally violated someone’s copyright, whether in logos, designs, written words, software code, etc.
Understanding Claims-Made E&O Coverage
As already mentioned, most E&O policies are claims-made policies, meaning that the policy must be active both when the alleged issue occurred and when the claim was filed.
It’s important to note that even if a claim arises and you properly report the matter, you may not be covered if the actual service occurred before the retroactive date. The retroactive date typically coincides with the date you first started purchasing continuous professional liability insurance and keeps providing you prior acts coverage.
This demonstrates the importance of making sure that you purchase the professional liability policy early (ideally when the company is founded) and that you are continuously renewing your policies on time so that you don’t get caught with a coverage gap or deletion of prior acts coverage.
What Is Not Covered by Professional Liability Insurance?
An important factor to take into consideration with professional liability coverage is that you will never be covered if the act is proven to have been an intentional one. If the act is proven an intentional one, this would be considered a criminal offense and your professional liability policy would not cover it.
Therefore, if you committed intentionally illegal, dishonest or malicious acts, you won’t be covered.
You will also not be covered if you knew about a claim before the policy incepted. This is another reason to continuously buy E&O insurance as you must report matters once you find out about them. There is also no hiding. If you know of a matter, buy insurance and then try to report it as a new claim, the discovery process will almost always uncover the knowledge date.
Some issues that are often confused with E&O insurance are bodily injury and property damage, which are typically covered by a general liability policy, not a professional liability one.
And as already mentioned, you will not be covered outside of the duration of your policy if the E&O coverage is a claims-made policy.
Highly-Publicized Examples of Professional Liability Insurance at Work
- A woman sued a financial planning firm for $3 million after following their advice to quit her job, start a home business and transfer her savings into their pension plan.
See: Her financial adviser’s bad advice led a judge to OK Sudbury woman’s $3M lawsuit
- Pop superstar Rihanna won a $10 million settlement after her accountant gave her bad advice which led to her “squandering $9 million in one year.”
See: Rihanna settles multimillion-dollar lawsuit with ex-accountants
- Law firm Reed Smith was slapped with a $500 million malpractice lawsuit filed by two defunct Bear Stearns investment feeder funds that Reed Smith represented in RMBS-related litigation.
See: Biglaw Firm Hit With $500 Million Malpractice Suit
A real estate agent to the stars faced a lawsuit over accusations he overstated the square footage of a multimillion-dollar mansion.
See: Hollywood Real Estate Agent Chris Cortazzo Sued Over Missing Square Footage
- A parish in New Orleans settled a lawsuit against architectural firm Wisznia Associates for $1.3 million, less than the parish paid Wisznia to design the building, which has almost doubled in cost to $50.7 million and was behind schedule. Wisznia’s professional liability insurance policy was capped at $1 million and gave its defense counsel first dibs on the payout.
See: Jefferson Parish settles lawsuit with performing arts center architect
Professional Liability Insurance Costs
The cost of professional liability Insurance varies based on the services provided, the size of the company, and its clientele. There is no standard cost structure for professional liability insurance, but it is often more affordable than people expect.
If you want to be fully covered without overpaying, your coverage needs to be customized to your business risk profile, not just your business niche.
The primary factors that will decide how much your professional liability insurance is going to cost you include the industry in which you operate, the size of your business, your location and your claims history.
Obviously, large entities which operate in a high-risk industry, work with affluent clientele in affluent cities, and have a history of malpractice claims will likely pay the most for professional liability insurance.
When buying an E&O policy, expect your underwriter to ask for access to contracts, quality control, training procedures, and revenue information. This information will give them a good idea of the level of risk that is associated with your business on an everyday basis.
There are some steps that you can take to help mitigate claims; client selection first and foremost. Dealing with trustworthy clientele will make your business far safer than taking on any client looking for a service.
Make sure your engagement letters are always very specific regarding what needs to be done for what fee and that you have the competence to sufficiently deliver. Practice open communication and do not promise things that you cannot professionally produce. Implement quality control procedures to make sure that you and your staff are not delivering a substandard product or service to your customers.
If you have questions about what level of professional liability insurance makes sense for your business, reach out to our team of expert brokers or sign up here. Let our smart, data-driven experts guide you through the process and get a free quote.
Rather than being elusive and forcing terrible paperwork on you, our brokers make insurance quick, simple and painless — thanks to cloud-based technology and partnerships with many of the top-rated business insurance companies in the country.
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