What Is Professional Liability Insurance?
Professional liability insurance, also called errors and omissions or professional indemnity insurance, protects service businesses from the cost of defending negligence lawsuits and other claims of service-related errors. Service professionals and business owners who provide expert advice should purchase professional liability coverage.
Succeeding in a service industry or profession can be difficult. You always strive to do your best work and keep your clients happy. But sometimes, no matter how well you assess a client’s situation, things don’t go according to plan.
This is where small business insurance can help. Professional liability coverage is designed to help service professionals—such as accountants, architects, and real estate agents—who are sued by customers for an alleged mistake or failure to act. If you provide expert advice or services, you should think of professional liability insurance as a necessity.
Learn what professional liability insurance covers and doesn’t cover, how much it costs, where to buy professional liability insurance, and how to keep your costs as low as possible.
Who Needs Professional Liability Insurance?
Professional liability insurance, also called professional indemnity or errors and omissions coverage, is designed for any small business owner who provides a service or makes a living from their expertise.
Some states require doctors and lawyers to purchase professional liability insurance. In those professions, professional liability insurance is more commonly referred to as malpractice insurance.
Even if you’re not in the medical or legal industry, you can benefit from coverage. Here are examples of business owners who should purchase professional liability insurance:
- Architects, designers, and engineers
- Real estate brokers
- Financial consultants
- Accountants and bookkeepers
- IT professionals and programmers
- Marketing and advertising professionals
In all of these examples, the business owner provides advice or services to clients who could potentially experience harm as a result. For instance, let’s say you’re an architect who recommends certain materials for constructing a new building. If the materials break down and the client has to pay to redo the building, the client might take legal action against you.
Even a lawsuit that doesn’t have merit can be very expensive to defend. Professional malpractice lawsuits are the most time-consuming kind and cost the median small business $122,000 in legal fees. Having to pay for those costs out of pocket can sink your business into debt, or worse, even force it to close down.
No matter how careful you are, mistakes can happen if there are miscommunications or if employees don’t follow training. Professional liability coverage is the primary type of insurance to help you protect against lawsuits that claim service-related errors.
What Professional Liability Insurance Covers
Professional liability insurance covers any claims related to the provision or failure to provide a service. Negligence is the most common type of legal claim that professional liability insurance protects against. However, covered lawsuits can also allege misrepresentation, breach of contract, or violation of good faith and fair dealing. Depending on the scope of the professional liability policy, it could also extend to invasion of privacy claims, pollution liability, and copyright infringement.
If your business is sued and you have professional liability insurance, the insurer should provide a lawyer to defend you against the lawsuit. They will also pay any damages that arise from the lawsuit. The coverage should apply whether or not you’re actually at fault, and extends to allegations brought against you, your business partners, or employees (even independent contractors might be covered by some policies).
Professional Liability Insurance: Examples of What’s Covered
Here are some examples of incidents that would be covered by a professional liability insurance policy:
- An engineer builds a faulty website for a client that goes down just before a product launch. The client sues the engineer for negligence and loss of income.
- A doctor misdiagnoses a patient’s condition, causing them mental anguish and increased medical costs. The patient might sue the doctor for malpractice.
- An architect uses poor materials to construct a new building. The building collapses mid-way through construction, and the client has to rebuild. The client company can sue the architect for negligence.
- A company contracts with a supplier for raw materials, but the supplier fails to do a quality assurance check as specified by the contract. They client is unable to use the materials and suffers lost sales as a result. They can sue the supplier for breach of contract.
- A company’s marketing team inadvertently uses another’s company’s copyrighted images in social media marketing. The company that owns the images sues for copyright infringement.
As you can see, professional liability insurance covers a wide range of incidents.
Professional Liability Insurance: What’s Not Covered
Although professional liability insurance covers a wide range of claims, there are some things that a policy won’t cover. The good news is that, when professional liability coverage doesn’t apply, there’s often an alternate small business insurance policy that will cover you.
Here’s what professional liability coverage usually doesn’t cover:
- Bodily injuries: Clients who are injured as a result of products or services are usually covered by product liability insurance or general liability insurance. The exception is medical malpractice, where bodily injuries are covered. Employees who are injured on the job are covered by workers compensation.
- Property damage: Physical damage to a company’s property is covered by general liability or property insurance.
- Intentional wrongdoing: Intentional mistakes are not covered by professional liability policies. For example, imagine a business owner who intentionally turns in shoddy work for a client that they have a personal dispute with. The business won’t be protected by professional liability insurance.
- Illegal actions: Any criminally illegal acts by a business, such as violating securities laws or hacking into a competitor’s software, are not covered by professional liability insurance.
- False advertising: Professional liability coverage doesn’t cover false advertising claims.
- Employment discrimination: Claims of gender, race, or other forms of employment discrimination fall under employment practices liability insurance (EPLI).
Keep in mind that sometimes, different forms of insurance can come bundled together in one package. For instance, you can have an EPLI rider on a professional liability policy. Every policy is different, so make sure you read the fine print before committing to coverage, or work with a broker or trusted advisor.
Many people confuse directors and officers insurance (D&O insurance) with professional liability insurance. Although these two things are closely related, they are two separate types of coverage. D&O insurance is designed to shield management level employees against claims stemming from their decisions. Professional liability coverage protects actions (or failure to act) by any representative of your company.
How Much Does Professional Liability Insurance Cost?
The average annual premium for professional liability insurance is around $1,700. Factors such as your industry, business location, and the training you provide to your employees can all affect the cost of professional liability insurance.
Here are factors that affect the cost of professional liability insurance:
- Amount of coverage: The more coverage you need, the higher your premiums will be.
- Deductible: Deductible is the amount of money you have to pay out of pocket for a covered claim, before the insurance coverage will kick in. The higher your deductible, the more risk you take on and the lower your premium will be.
- Industry: Certain industries, like architecture and construction, are more prone to negligence lawsuits than other industries and face larger premiums.
- Company size: The larger a company is, the higher the premiums will be because a larger company is likely to have higher legal costs.
- Business location: Lawsuits are costlier in large cities, such as New York City and Chicago, versus smaller cities and towns.
- Contracts: Businesses that enter into more contracts or into contracts of higher value are more likely to face negligence or breach of contract claims.
- Training/quality control: Companies that provide training to their team members and have effective quality control procedures in place will see a lower incidence of lawsuits. These companies will have lower premiums.
- History: The insurer will consider the history of any lawsuits filed against your company. Previous judgments against you can increase your premiums.
Some of these factors, such as industry and location, are out of your control. However, you do have control over your training and quality control processes. You can submit training documents and quality control protocols to insurers when you’re shopping around for a quote. These indicate that you have limited your legal exposure, so they can result in lower premiums. You can also lower your premiums by having a business attorney review company contracts.
Remember to carefully assess the amount of coverage you need, as well as the deductible you’re willing to pay. It’s not always possible to accurately predict how much coverage you’ll need in the future. However, many clients require freelancers and contractors to have a minimum of $1 million in professional liability coverage, and coverage options increase from there in increments of $1 million. You should also think about how much money you have in your business’s bank account or rainy day fund to cover legal fees.
Another way to trim costs is to bundle multiple types of insurance into a single business owner’s policy (BOP). A BOP brings together common types of property and liability coverage, saving small business owners the time and cost of buying these separately. Most insurers offer BOPs to small businesses.
Where to Purchase Professional Liability Insurance
There are many options for purchasing professional liability insurance. Many small business owners use an agent or broker to help them navigate their options. Agents and brokers typically earn a commission from the insurance company, and their fee is already factored into your quote.
If you’d rather not use an agent or broker, you can also directly contact insurance companies or use online insurance comparison sites. No matter which option you go with, make sure the insurers you’re considering have at least an A rating for financial strength from A.M. Best.
Photo credit: Hiscox
Top Providers of Professional Liability Insurance
Here are the top insurance providers for small business professional liability insurance:
Hiscox has over 100 years of experience helping businesses obtain insurance. Other top insurers, like Geico, actually partner with Hiscox to provide business insurance, so you know they’re one of the premier providers.
You can call Hiscox representatives for a quote anytime Monday to Friday 8 a.m. to 10 p.m. ET. If you prefer an online experience, Hiscox has a questionnaire which you can fill out with information about your business to get a quote. Should you choose to go ahead with the quote, you can purchase the policy online, securing coverage that same day.
Another reputable business insurance company is Chubb. Chubb offers professional liability insurance for business owners in a number of industries, including architecture, education, media, and many more. Policy limits go up to $20 million, so a business of any size will be protected.
Chubb offers some unique advantages for small businesses. Similar to Hiscox, you can get a quote and purchase a policy from end-to-end online. Alternatively, you can go through an agent if you want more personalized assistance. Whichever route you take, the process is designed to be as fast as possible, with the agent or form asking the essential questions needed to generate a quote. You can even obtain proof of insurance and report a claim online, a convenience that not all insurers offer. Price points are also small-business friendly with Chubb. They offer competitive rates, including a home business discount.
Next Insurance, which launched in 2016, is a relatively new entrant to the small business insurance space. Professional liability insurance is one of three products that the company currently provides. Convenience and affordability are the two biggest value adds of using Next Insurance for small business owners.
The experience is a completely digital, one-stop insurance portal. You can apply online for insurance, buy your policy online, submit claims online, and get proof of insurance online. Each professional liability policy is written from the ground up, tailored with the individual business in mind. And Since Next does everything in-house, they have less overhead than other insurers or insurance comparison sites and don’t charge any fees. This means lower prices for business owners. According to the company, Next offers the most affordable liability policy on the market over 80% of the time. This is insurance that is easy to understand, simple to manage, and instant.
If you’d rather not spend your time contacting individual insurance companies, an easier way is to use an insurance aggregator and comparison site like Insureon. Insureon’s platform is only for business insurance, and they partner with some of the biggest insurers, including Hiscox, Chubb, and CNA.
You can get a quote online in under 15 minutes, but be ready to provide detailed information about your business, such as revenue breakdown by business activity and ownership breakdown among business partners. You’ll then be able to compare cost and coverage details for each insurer. To purchase the policy, you’ll need to call Insureon.
Insureon also provides a lot of cost data for business owners who are shopping around for insurance, sourced from their own customers.
Photo credit: CoverWallet
Similar to Insureon, CoverWallet is another insurance marketplace for small business insurance. After you fill out a form with some detailed business information, CoverWallet’s team will work on generating a quote for you. You can be up and running with a policy within a few hours, versus the days it typically takes if you go direct to an insurance company.
The application is a little faster and user-friendly than Insureon, and CoverWallet has greater online capability. According to the company, about 70% of small business customers are able to purchase policies online. In the other 30% of cases, there is more human interaction, and an agent will call you to discuss your options.
Once you purchase insurance, you can easily manage your policy from your CoverWallet account. View your policy, claims history, upcoming premium payments, peer comparisons, and insurer certificates online. The peer comparison is especially helpful because it allows you to see what other companies in your industry are paying for insurance.
Professional Liability Insurance: Essential Coverage for Service Providers
If you are in a service or professional business, such as architecture, financial services, or engineering, professional liability insurance can give you the peace of mind of knowing that you’re protected from claims of negligence or service-related errors.
That said, hundreds of insurance companies sell professional liability insurance, and knowing which insurer to try and eventually which policy to purchase can be confusing.
Here are some tips on what to look for in a professional liability insurance policy:
- The insurer should have at least an “A” financial rating from A.M. Best.
- Understand what types of claims are covered and the time period of covered claims.
- Make sure that the company will defend you in the event of a lawsuit and pay legal costs and any damages that are awarded.
- Know your deductible, annual premium, policy limits, and any cancellation fees.
- Learn if you need to pay your full annual premium up front or whether you can pay in chunks.
- Ensure that the claims filing process is easy and transparent. Ideally, claims should be handled by the insurer, not subcontracted out.
By following these tips, you can ensure that you have comprehensive professional liability insurance for your business and can handle whatever comes your way.