Professional Liability Insurance:
What is professional liability insurance?
Professional liability insurance, also known as professional indemnity insurance, is a policy that gives businesses or individual professionals coverage for losses that arise due to professional negligence, misconduct, or errors during their work. It acts as a safety net for the financial consequences of mistakes you might make during the course of your work.
Professional liability insurance is necessary for businesses and individuals who:
- Provide any professional service.
- Provide consultation or advice to clients.
- Have a contractual obligation for this insurance with their clients.
Professional indemnity insurance also includes defense costs along with loss from damages or settlements. A usual business owners policy will not include professional liability coverage because these policies cover different kinds of losses.
What does professional liability insurance cover?
Professional liability insurance covers defense fees, settlements, and reputational damage as a result of client lawsuits alleging that your work was unsatisfactory. According to the International Risk Management Institute, barring very specific exceptions (medical professionals, architects, and engineers), professional liability will only cover third-party financial losses.
Quality of work is subjective; you might disagree with the client regarding the quality of your work. However, you will still need to defend yourself in court, which can be financially taxing on your business. The wording of the policy plays a huge part on coverage. “Negligent act, error or omission” is not as tightly worded as “negligent act, negligent error, or negligent omission”, and might deny coverage for lawsuits for non-negligent errors as stated by Investopedia.
Depending on the profession, professional liability insurance can be sub-categorized into:
Errors & Omissions insurance
Errors & Omissions (E&O) insurance is a professional liability policy tailored explicitly for occupations such as accountants, CPAs, agents, and other contractual professionals.
Malpractice insurance is a professional liability policy tailored for professionals whose shortcomings can result in significant loss to their clients, such as healthcare workers and lawyers.
Some professional liability policies also include directors and officers (D&O) insurance, which indemnifies businesses against costly mistakes and oversight by the board of directors.
Additionally, employment practices liability insurance (EPLI) can also be bundled into a professional liability policy, depending on the insurer. EPLI protects the business from lawsuits filed by employees alleging unfair or illegal employer practices, including wrongful termination, sexual harassment, discrimination, and similar incidents.
Professional liability insurance covers:
- Claims arising due to actual or alleged negligence
- Legal defense costs for any claims
- Personal injury claims (libel or slander)
- Copyright infringement lawsuits
Professional liability insurance does not cover:
- Bodily injury
- Illness or loss caused due to products
- Property damage
- False advertisement claims
If your business generates revenue off expertise, professional liability insurance is a must. Consider the following scenarios:
- You’re a marketing consultant, and you design a marketing campaign for a client. However, you fail to produce the expected amount of leads, and your client sues you.
- You’re a lawyer defending your client, and you overlook a vital piece of evidence that leads to a conviction. Hence, your client files a malpractice suit against you.
- You’re a freelance writer, and you are writing a manuscript for a client. However, you fail to meet the deadline, which makes the client lose money and sue you.
- You’re a construction contractor, and you make an order for an expensive material that cannot be used in the project. Hence, your client sues you for extending the deadline and causing financial loss.
The risks mentioned above are the kinds of risks that professional liability insurance covers.
Common endorsements and exclusions of professional liability insurance
There are a few common endorsements and exclusions in professional liability insurance that you need to consider. These include:
Professionals have the option of opting for either a claims-made or a claims-occurrence policy. A claims-made policy will cover damages that occur after a set retroactive date in the policy, regardless of when the claim was reported to the insurer.
However, a claims-occurrence policy will cover losses that occur during the effective period of the policy. You have the option of choosing one or the other, but professional liability coverage is often obtained on a claims-made basis.
Insurers will usually add a prior-knowledge exclusion to the policy. This exclusion prevents professionals from obtaining a policy for an error they committed before the retroactive date. This exclusion is present in claims-made plans.
According to the National Law Review, if it is proven that the insured has a reasonable basis to believe the claim will occur after a retroactive date but before they obtain the policy, such claims will be excluded.
Professional liability insurance does not cover damages due to intentional fraudulent acts. The policy will cover defense costs for any claims alleging fraud. However, insurers will ask businesses for a reimbursement if they are held legally liable for fraud.
Securities or intellectual property exclusions
Professional liability insurance usually exclude indemnification for security or intellectual property related works. If your job involves either of these, you will need to get a separate endorsement on your policy.
Fiduciary-related claims are also excluded in professional liability insurance. Hence, if you provide fiduciary services or look after a trust, you will require fiduciary insurance.
Cyber liability exclusions
Professional errors that result in loss or compromise of client data is not covered by professional liability insurance. So, this kind of risk should be managed with cyber liability insurance.
Types of insurance that include professional liability insurance policy
Professional liability insurance is included in various industry-specific insurance packages. These include:
How is the premium decided for a professional liability insurance policy?
There is no set premium for professional liability insurance. The premium depends on a variety of factors. Hence, your premium and deductible will vary according to the underwriting guidelines for each insurer.
Different factors are considered and given weightage during the underwriting of the policy. If your calculated premium is lower than the minimum threshold of the insurer, you will pay the minimum premium. The Insurance Information Institute estimates that professional liability premium usually amounts to anywhere between $1,000 to $25,000.
However, an article in Bezinga stated that self-employed professionals can expect the same coverage for $500 to $1,000 per month.
A few known factors that affect the premium are:
Type of business
The kind of risks your work faces is reflected in your premium. Hence, if your profession has a high exposure to professional liability, your premium is bound to go up.
For example, architects working in high-value construction projects will pay more premium than a small repair contractor.
A business with a history of multiple claims will pay a higher premium than one with zero claims.
Risk management practices
Underwriting guidelines also take into account risk management practices adopted by a business. Usually, these guidelines include tightly worded contracts, review and reporting methods, billing processes, and more. Hence, insurers reward businesses that practice comprehensive risk management with lower premiums.
Hours of operation
Typically, professionals who work part-time will have a lower premium than full-time professionals.
Besides these factors, you can also reduce your premium by:
Obtaining multiple policies from the same insurer
Insurers offer discounts if you purchase multiple policies from them. A business usually requires different types of insurance, and it will be profitable for you to obtain all of them from one insurer.
Raising your deductible
By increasing your deductible, you are effectively taking on more risk on yourself. Therefore, insurers reward this by lowering your premiums.
Choosing an insurer geared for your business
Insurers have preferences for businesses they want to insure. Hence, if your business falls under a category that the insurer focuses on, you will likely get a lower premium.
Remember, low costs should not be the most significant factor that dictates your insurance purchases. Adequately covering all your risks is a lot more important than the premium.
What are common claims for professional liability insurance?
Professional liability insurance covers damages that are not included in general liability or worker’s compensation. Hence, it covers legal fees and financial losses as a result of professional mistakes. An article in the Insurance Business Magazine America states that professional liability claims often arise due to the simplest reasons, such as a missing number or a few words in the contract.
Consider the following examples:
- A CPA in charge of managing a client’s tax record misfiles tax codes that lead to thousands of dollars in damages. Since there isn’t any injury, property damage, or advertising damage, general liability will not cover the costs. Hence, professional liability will cover any lawsuits and settlements that come from this mistake.
- A marketing firm designs a website and a funnel promising a client an estimated number of leads. However, the campaign fails. However, this loss is not covered by advertising damage since the marketing firm is performing a contractual obligation. Hence, it is a professional liability claim.
- An accountant making a clerical error such as a mistake in a form or a misplaced document can cost thousands of dollars in losses. Hence, clerical errors are also a common claim of professional liability insurance.
- Even though you have done nothing wrong, clients can still sue you for perceived damages because they aren’t satisfied with your work. You will always have to defend the lawsuit, which can be expensive. Hence, legal fees for defense of such suits are also a common professional liability claim.
- Another common claim for professional liability insurance is a breach of contract. When a business fails to meet the terms of an agreement with a client, such as deadlines or types of materials to be used, the client can file a breach of contract lawsuit.
FAQs about Professional Liability Insurance
What is the difference between general and professional liability?
A general liability policy covers damages that arise as a result of your business operations. Broadly, it covers three types of damages: bodily injury, property damage, or advertising damage.
However, professional liability indemnifies the business against losses that result from professional errors or negligence. These claims are monetary and usually result in a lawsuit.
Do I need professional liability insurance?
Professional liability insurance is a must for businesses that generate revenue through expertise or advice. Hence, if your business primarily engages in such tasks, such as marketing, accounting, real estate brokerage, or other similar industries, professional liability is a must.
However, businesses outside the service sector are also opting for professional liability insurance. In most cases, clients they work with require professional liability insurance as a contractual obligation. In such cases, you will need professional liability insurance. Otherwise, you risk a breach of contract lawsuit. We’ve previously touched upon the list of industry-specific insurance plans that include professional liability insurance as a core policy.
What is the difference between E&O insurance and professional liability insurance?
E&O insurance and professional liability insurance cover different kinds of industries. E&O insurance is a type of professional liability insurance reserved mostly for agents, brokers, or consultants. However, professional liability is more of a blanket policy for different kinds of industries.
What is the difference between malpractice insurance and professional liability insurance?
Similar to E&O insurance, malpractice insurance is a type of professional liability insurance reserved mostly for legal professionals and medical professionals.
Will professional liability insurance cover for intentional fraudulent acts
No. Professional liability insurance will provide defense costs for allegations of fraud and intentional misconduct. However, if the business is held liable in court, insurers will ask for a reimbursement.
Is professional liability legally mandated?
No. There is no specific mandate for professional liability insurance. But, insurance law compels businesses to obtain policies that adequately indemnify their risks, so professions like solicitors, CPAs, and healthcare professionals will require this insurance.
Client contracts might also stipulate professional liability insurance, in which case the business is contractually obligated to obtain this policy. However, Law.com states that the state bar of Georgia is voting to mandate lawyers to obtain professional liability coverage on March 2020. Other professions might also follow suit.