How Professional Liability Insurance Works

As a business owner or professional, you strive to provide the best services to your clients at all times. But mistakes happen no matter how careful you are or how long you've been in the business. And if a customer suffers a financial loss, they may sue your company regardless of whether you are truly at fault. Even if you win the lawsuit, dealing with costly litigation can be devastating to your business, especially for smaller businesses with fewer resources.

This is where professional liability insurance can come in handy. It's the financial cushion you need to weather unexpected claims—so you don't have to pay out-of-pocket for expensive legal defense costs.

So, what should you anticipate from professional liability insurance? Stay tuned as we go over everything, from how it works and what it covers to the variables that influence how much you'll pay.

What is Professional Liability Insurance?

If you're an expert in a particular field, such as an accountant, lawyer, consultant, or physician, you're aware that your services can result in financial or indirect loss for your clients. However, general liability insurance does not cover professional negligence, error, or omission claims. This is where professional liability insurance comes into play.

This type of coverage, also known as errors and omissions insurance, protects your company if a client sues you for financial damages resulting from the professional service you provided. It assists you in paying the defense costs and judgments resulting from professional negligence, error, or omission claims.

What Does Professional Liability Insurance Cover?

It's an unfortunate reality that a client may decide to sue your company for a variety of reasons, whether or not you're at fault. However, professional liability insurance protects your company from such claims. It is intended to cover legal and settlement expenses regardless of whether an error occurred. The following claims are typically covered by professional liability insurance:

Work errors or mistakes: Even a simple mistake can cost one of your clients money and lead to a lawsuit.

Example: someone at your accounting firm enters a company's financial transactions incorrectly or makes a mistake when filing their taxes, resulting in a financial loss. If the client sues for damages, your policy will cover the legal fees.

Undelivered services: If you promise to deliver a service in a specific way and fail to do so, your client may sue—especially if the failure to meet expectations has a negative impact on their finances.

Example: Let’s say you’re a management consultant who is guaranteed to increase a company’s profits by 30% by an agreed-upon date. If profits haven’t improved by 30% by that date and the company sues, your insurance would cover the legal defense costs.

Actual or alleged negligence: If your company is accused of negligence, such as failing to meet industry standards, you may face a professional liability lawsuit.

Example: If a patient at your clinic or hospital claims that they were injured as a result of a misdiagnosis or surgical error, your insurance would cover the cost of any subsequent settlement.

Failure to deliver services by the agreed-upon deadline: Missed deadlines happen to everyone, but if it affects a client's bottom line, you may be held accountable.

Example: If you miss a filing deadline for a client's tax return and the IRS fines your client, you may be sued to recoup the expenses. Professional liability insurance, on the other hand, will cover the cost of hiring a lawyer in addition to the settlement payout.

Breach of contract: If a customer or client accuses you of failing to fulfill your contractual obligations, you may face legal consequences.

Example: If you fail to make a timely payment to a client, you may face a breach of contract lawsuit. Fortunately, insurance can protect your company from client lawsuits based on an actual or alleged breach. However, professional liability insurance is a claims-made policy, which means it only covers breach of contract claims that occur while your policy is in effect. That is why, for maximum protection, you must maintain continuous coverage.

What Does Professional Liability Insurance Not Cover?

Although professional liability insurance covers mistakes and oversights in the workplace, it does not cover everything. It will not help your business, for example, if you make the following claims:

Bodily injury: If a client trips in your office and breaks a bone, general liability insurance would cover it. Professional liability, on the other hand, typically covers bodily injury for healthcare professionals, engineers, and architects.
Property damage: Professional liability insurance does not cover third-party property damage in most professions. For example, if a customer's files are destroyed in a fire, general liability would apply. If you are an architect or engineer, professional liability will usually cover property damage.
Employee discrimination: If an employee files a lawsuit claiming discrimination, such as wrongful termination or workplace harassment, professional liability coverage will not apply. Instead, employment practices liability insurance will be required.
Employee injury: If one of your employees is injured or becomes ill on the job, you'll need worker's compensation insurance to help them recover and return to work.
Personal and advertising injury: This includes things like slander, libel, publications that violate privacy, copyright infringement, false arrest, wrongful eviction, and malicious prosecution. If your business is sued for any one of these instances, it will typically be covered by general liability.
Data breach: If your company loses confidential or sensitive information about its clients or customers, cyber insurance will be required to provide coverage.

A professional liability policy must be in place at the time a claim is filed in order for it to pay out. You may be able to purchase additional coverage for a limited time before the policy begins. However, if you let your coverage lapse, you will lose protection for your company.

Do I Need Professional Liability Insurance?

Professional liability insurance is required by law in some industries. Healthcare professionals, for example, require medical malpractice insurance, which is a type of professional liability. Professional liability insurance, whether required by law or not, is a must-have to protect you from client lawsuits.

Furthermore, your clients may require it before agreeing to do business with you. They'll want assurance that they'll be protected if your company fails to keep promises or violates the terms of your contract. If any of the following apply to your company, you should seriously consider purchasing professional liability insurance:

You provide professional services to customers directly.
You must sign a contract requiring you to carry coverage.
You frequently provide advice to your clients.

Professional liability insurance should be carried by the following businesses:

Lawyers or law firms
Accountants or auditors
Consultants
Architects
Engineers
Home inspectors
Insurance professionals
Real estate agents and brokers

How Factors Affect Costs of Professional Liability Insurance?

The cost of professional liability insurance varies depending on the business. Some of the factors that can influence how much you pay are as follows:

Type of business: Professionals in certain industries, like construction, will face more risks and may pay more for coverage as a result.
Policy limits: If you want a policy that pays out more per incident or per year, you'll need to increase your coverage amount, which will cost you more money.
Years in business: Companies that have been in operation for a longer period of time tend to pay a lower rate than newer ones.
Location: Is your business located in an area that’s at high risk for vandalism or damage from earthquakes or flooding? If so, you should expect to pay more.
Claims history: If you've made claims in the past, insurers will classify you as a higher risk, raising your monthly premium.

Protect Your Business’ Future with Professional Liability

A professional liability insurance policy provides peace of mind for your company, and selecting one does not have to be costly or stressful. With our quick and affordable free online business insurance quotes, we make insurance shopping simple. Best of all, we have the industry's lowest coverage rates. Get a quote and join the other business owners who are saving money on their insurance every month!