It’s 8 pm on Friday evening, and you’re getting ready to wind down for the night. As you close your eyes, they suddenly pop back open. Today’s an important deadline for one of your top-paying clients, and the work isn’t done yet. It slipped your mind all week!
As panic starts to build, you have to decide what to do.
You can either fight through the fatigue to get everything done tonight or let them know you’re going to need a bit more time to finish things up. Either way, this honest (and completely human) mistake may set you up for a negligence claim down the road.
Whether your mistakes are intentional or not, your clients can file a claim against you, especially if your wrongdoings cause them to lose money.
And now… you have a whole new problem to worry about — the astronomical costs of defending yourself (and/or paying the damages owed to your client).
These situations happen all the time. Because of that, it’s a good idea to consider professional liability insurance to help ease the financial burden cases like these can put on your small business.
So today, I’m going to talk about what it is, how it works, what it covers, what it doesn’t, and how much it costs to get started. Let’s dive in!
A Short and Sweet Intro to Professional Liability Insurance
Professional liability insurance, known under different names like errors and omissions insurance, E&O insurance, or professional indemnity insurance) protects professional service providers from negligence claims made by their clients. Professional liability insurance often covers negligence, copyright infringement, personal injury, and more. This can include damages caused by things you, your staff, or any independent contractors you hired, did or should have done for a client or patient. Medical providers may refer to this coverage as medical malpractice insurance. Here’s a quick example.
Pretend you’re an attorney and you provide clients with legal advice. One of them follows this inaccurate advice and ends up losing tens of thousands of dollars as a result. So, they decide to file a negligence claim against you because they don’t believe you followed through on your obligations as a lawyer.
There are some exceptions for professions such as architects, and engineers who would instead use commercial general liability policies.
Professional liability insurance can help protect your business in cases like this.
What’s the Difference Between General and Professional Liability?
Both general and professional liability insurance exists to protect you and your business from the financial burden of negligence claims filed by your clients. While they do have similarities and potential overlaps, they’re not one and the same. So, how do they differ?
I’m glad you asked!
General liability insurance covers physical injuries like bodily injury or damage caused by negligent work. Let’s say someone hires you to add an extension to their house. The extension you built collapses and takes a section of the house with it. In this case, general liability insurance may help cover the financial burden taken on by your business.
On the other hand, professional liability insurance protects against negligent professional advice or services or alleged errors and omissions that typically include financial loss to the client. In this case, no one is physically hurt, and there’s no physical property damage.
How Does Professional Liability Protect Your Business?
When a client files a claim against you, your professional liability insurance provider may help cover the costs of defending yourself and any damages owed to the client.
Depending on the industry you’re in, professional liability insurance may also be called:
- Malpractice Insurance
- Professional Indemnity Insurance (PII)
- Errors and Omissions Insurance (E&O)
Regardless of the name, they cover the same types of cases.
Most professional liability policies only cover claims made during your policy period. Some insurers may retroact the start date, so it’s important to understand what date your new policy goes into effect.
Who Needs Professional Liability Insurance?
Certain professionals in specific states may be required by law to have professional liability insurance. Furthermore, many clients require the professionals they work with to have some form of negligence coverage.
But it’s also an important consideration for any service provider regardless. Because let’s face it. As humans, we’re imperfect and mistakes are bound to happen. Which… can go both ways.
A client could file a claim against you even if you didn’t do anything wrong. Or you (or your employees) could make an honest mistake that results in a devastating loss for a client.
So take time to carefully consider professional liability insurance if you do any type of work that directly impacts your clients’ lives, financial situations, or health (including product offerings — not just services). Typical professionals who carry these policies include:
- Lawyers and attorneys
- Consultants and coaches
- Freelance service providers
- Accountants and tax professionals
- Financial advisors
- Home inspectors
- Personal trainers
- Massage therapist
- Medical practitioners
- Programmers and developers
- Real estate agents
Honestly, the list could go on forever. If you own a business or provide any type of specialized professional service, consider your professional liability options.
What Does Professional Liability Insurance Cover?
Oftentimes, clients file claims against you regardless if you or your employees did anything wrong. And other times, these cases are justified. No matter the situation, it’s important to understand what’s covered under your professional liability policy.
While the type of coverage needed will depend on the plan you choose, most policies include coverage options for:
- Mistakes, errors, or oversights made by you or your employees
- Services that weren’t delivered on time (or at all)
- Miscommunication or misrepresentation
- Missing essential deadlines
- Claims of negligence
- Libel and slander
- Copyright infringement
- Legal fees
- Legal defense costs
What Doesn’t Professional Liability Cover?
While professional liability insurance policies cover a lot of situations, they don’t cover everything. As I mentioned before, there’s a separate type of insurance called general liability coverage that covers third-party damages and personal injuries as a result of negligence.
So, professional liability won’t protect you in these situations.
Additionally, if you work in the technology or medical industry, you may need specialized professional coverage that helps protect you against industry-specific claims and situations.
Other things professional liability insurance doesn’t cover include:
- Criminal lawsuits and cases
- Every type of legal liability (each policy is different)
- Employee injuries
- Company vehicles (See business vehicle insurance)
- Discrimination lawsuits
- Physical damage to your business (See Business Property Insurance)
How Is This Different from Malpractice Insurance?
Malpractice insurance is a specialized type of professional liability insurance for the medical industry. Malpractice insurance exists for numerous high-cost claims that happen within the medical field.
This type of insurance policy specifically covers medical professionals like physicians, nurses, dentists, and other licensed medical care providers. They typically cover cases involving malpractice that lead to wrongful death, medical expenses, and property damage.
Is Professional Liability Insurance Required?
Some states require specific types of higher-risk professionals to carry professional liability coverage while other states and industries don’t. Furthermore, some clients you work with may ask that you have a policy in place.
However, professional liability insurance is an important thing to consider if you offer specialized services or sell specialized products that impact the overall wellbeing of your clients and customers.
How Much Does Professional Liability Insurance Cost?
The median cost across all industries and business types are $60/month. With that being said, most small business owners (51%) can expect to pay between $500 – $1,000 per year for professional liability insurance.
But this cost can vary greatly depending on your industry.
Image via Insureon
How Is it Calculated?
Every business is different, and so is every industry. There’s no “one policy fits all.” So the cost of professional liability insurance varies depending on several factors, including:
- Your industry
- High-risk vs. low-risk
- Location (prices vary by state)
- Number of employees and clients
- Your claims history
- Credit score (depends on the state)
- Coverage limits
- Retroactive period
Furthermore, there are several things you can do to help keep your professional liability costs low. Choosing high-deductible plans can help lower your monthly premium. And like most types of business insurance, having a clean record is an indicator of low risk.
So, it may also help keep coverage prices low for your business.
How Do I Get Professional Liability Insurance?
To get started, most insurance providers ask to review several of your business documents with you. This helps give them a clear picture of your risk and history.
After that, insurers typically send a quote for your review. This includes your monthly premium and deductible, as well as what’s covered in your policy. Getting started with a provider is the easy part.
But choosing a provider isn’t so easy. A local insurance company can help with getting a quote or using comparison sites like Coverwallet to quickly let you review and compare the best coverage plans from top insurers for your specific industry.