What Is Professional Liability Insurance and How It Protects Your Business

Professional liability insurance is a type of insurance that protects businesses from financial losses due to errors or omissions in professional services.

This type of insurance is often required by contracts and can be a major differentiator for businesses competing for clients.

It can cover a wide range of professionals, including lawyers, doctors, and architects, who are at risk of being sued for malpractice or negligence.

The cost of professional liability insurance can vary widely depending on the type of business and the level of risk involved.

Businesses that require professional liability insurance may need to pay premiums that can be a significant expense.

Professional liability insurance covers a range of potential issues that can arise from your professional services or products.

It pays for damages to your customers or clients as a result of negligence, malpractice, errors, misrepresentation, incomplete or inaccurate work, and breaches of contract. This can include unintended mistakes, like accidentally erasing a client's data.

Professional liability insurance covers your legal fees and any damages you owe in the event of a lawsuit. This can be a huge relief, especially if you're a small business owner who can't afford to go out of business due to a single mistake.

Some common examples of what professional liability insurance covers include:

It's worth noting that professional liability insurance typically only covers incidents that occur during the policy period, unless you have a retroactive date. This means that if you've already done work or provided services, you may need to purchase a policy with a retroactive date to be covered for any potential issues that arise.

Professional liability policies operate on a claims-made basis, meaning coverage is triggered when a claim is made against the insured during the policy period, regardless of when the alleged error or omission occurred.

This is different from occurrence-based policies, where coverage is triggered based on when the incident resulting in the claim took place.

Professional liability policies often feature shrinking limits, which means the insurer's payment of defense costs reduces the available policy limits.

Shrinking limits contrast to CGL insurance, where defense costs do not typically reduce policy limits.

Professional liability policies may have a single limit that includes both indemnity and defense costs, so insureds may need to purchase higher professional liability limits to ensure adequate coverage.

Professional liability policies operate on a claims-made basis, meaning coverage is triggered when a claim is made against the insured during the policy period, regardless of when the alleged error or omission occurred.

This is in contrast to occurrence-based policies, where coverage is triggered based on when the incident resulting in the claim took place.

Professional liability policies often feature shrinking limits, which means the insurer's payment of defense costs reduces the available policy limits.

This can be a concern for insureds, who may need to purchase higher professional liability limits to ensure adequate coverage for both defense costs and potential settlements or judgments.

A single limit that includes both indemnity and defense costs is common in professional liability policies, making it essential for insureds to carefully review their coverage terms.

Policy wording can be confusing, even for professionals. Professional liability policies are worded differently by providers, making it difficult to compare coverage.

Some policies might be expressed in ways that make them easier to compare, while others might differ significantly. This can lead to coverage gaps that aren't immediately apparent.

For example, consider two phrases: "negligent act, error or omission" and "negligent act, negligent error, or negligent omission". These phrases might seem similar, but they have significant legal differences.

The "negligent act, error or omission" clause indemnifies the policyholder against loss or circumstances incurred only as a result of any professional error or omission or a negligent act. However, a negligent error or negligent omission would not be covered because of the wording.

To clarify, here are the types of incidents that might be covered under different policy wording:

Before purchasing a policy, it's essential to talk to a lawyer who is familiar with professional liability insurance. This ensures you understand the policy wording and are covered for the types of incidents that matter most to your business.

Claims-made policies provide coverage for claims made against the insured during the policy period, regardless of when the alleged error or omission occurred. This means that coverage is triggered when the claim is reported to the insurer rather than when the incident causing the claim took place.

The retroactive date, also known as the retroactive or prior acts date, is a critical component of a claims-made policy. This date specifies the point from which coverage applies for claims arising from past acts, errors, or omissions. Claims arising from acts or services performed before the retroactive date are typically excluded from coverage, regardless of when the claim is made.

Professional liability policies cover claims arising from errors, mistakes, or negligence in the delivery of professional services. For example, if a consultant provides advice that results in financial loss for a client, the consultant may be held liable for the resulting damages.

Professional liability insurance can protect against a wide range of claims, including professional negligence or failure to meet a standard of care, failure to deliver a promised service on time, breach of contract, errors, and general professional misconduct.

Here are some common types of claims that professional liability insurance covers:

Professional liability policies often feature shrinking limits, which means that the insurer's payment of defense costs reduces the available policy limits. This is in contrast to CGL insurance, where defense costs do not typically reduce policy limits.

Common exclusions in professional liability policies include intentional or dishonest acts, bodily injury, and property damage.

Professional liability insurance can be a significant expense, but it's a crucial investment for professionals who want to protect their business from negligence and other claims. The median cost of professional liability insurance is around $61 per month, or $735 annually, according to Insureon.

Coverage limits and deductibles also play a role in determining the cost of professional liability insurance. Policy liability limits can range from $250,000 to $2 million or more, with many policies including limits of $1 million for a single claim and a $1 million aggregate limit.

Here are some factors that can influence the cost of professional liability insurance:

Protection is essential for professionals who face unique risks in their line of work. Professional liability insurance protects professionals against negligence and other claims initiated by their clients.

Professionals with expertise in a specific area require this type of insurance, including accountants, lawyers, and physicians. General liability insurance policies do not offer protection against claims arising from negligence, malpractice, mistakes, or misrepresentation.

Having professional liability insurance can provide peace of mind for professionals who want to protect their reputation and financial stability.

The cost of professional liability insurance is a crucial factor to consider when protecting your business. The median cost for professional liability insurance is around $61 per month, or $735 annually, according to Insureon.

Factors that influence the cost include the type of business you're in, with some industries being riskier than others. Your geographic area and the number of claims you've had against you in the past also play a role.

Policy liability limits can vary significantly, ranging from $250,000 to $2 million or more. Many policies include limits of $1 million for a single claim and a $1 million aggregate limit that lasts the lifetime of the policy.

To give you a better idea, here are some median costs for professional liability insurance from different providers:

Keep in mind that prices can vary, and the best way to determine the cost of professional liability insurance for your business is to get a quote.

Professionals who advise clients or provide services should consider personal liability insurance. This includes doctors, attorneys, and accountants, as they face a higher risk of being sued.

If you're a service provider, you should strongly consider purchasing professional liability, errors and omissions, or medical malpractice insurance. This includes accountants, attorneys, architects, designers, engineers, financial advisors, photographers, and real estate agents.

Some states or regulatory bodies may even require you to carry some degree of PL coverage. This is especially true for professionals like doctors and dentists, who are required by law to carry medical malpractice insurance.

If you work for a company that offers services, the company should have PLI, and your services should be covered under its policy. However, if you're a small business owner or solo practitioner providing professional services or contracting your services to other businesses, you should consider purchasing this type of insurance.

Professionals who need this insurance include consultants, engineers, insurance agents, real estate agents, brokers, architects, accountants, information technology professionals, counselors, doctors and dentists, and financial advisors.

Here is a list of professionals who may need professional liability insurance:

Medical professionals may be required by law to carry medical malpractice insurance, which specifically protects physicians, dentists, nurses, psychologists, and other medical professionals against claims that they made a mistake that led to a patient's injury or death.

Insurance agents, consultants, and brokers commonly purchase professional liability insurance to protect themselves against errors and omissions.

Accounting, engineering, and land surveying are other professions that frequently buy this type of insurance to manage risk.

Charities and nonprofits/NGOs also purchase professional-liability insurance to safeguard themselves against potential errors and omissions.

This form of insurance is widely used across various industries, with many professionals recognizing its importance in mitigating risk.

In the European Union, each country has its own framework legislation, resulting in a diverse range of options for professionals to choose from.

Professionals in high-risk fields like consulting, real estate, and insurance have higher premiums for professional liability insurance due to their increased exposure to errors and omissions.

These professionals often have higher premiums for PL insurance, while paying less for general liability insurance, which covers bodily injury or property damage.

Professional service providers like accountants, engineers, and architects require professional liability insurance to protect against economic or financial damages.

An architect's building plan containing a design flaw that led to structural collapse and injury would be covered by their PL policy.

Consultants, real estate agents, and insurance agents commonly purchase errors and omissions (E&O) insurance, also known as professional liability insurance.

Professions like accounting, engineering, and land surveying often require professional liability insurance to mitigate risks.

In the European Union, every country has its own framework legislation for professional liability insurance, resulting in a wide range of options.

The total value of professional liability insurance in the first 10 European countries is estimated to rise from $6.15 billion in 2009 to $7.5 billion by 2017.

Policy Types can be confusing, but it's essential to understand the basics. There are two main types of professional liability insurance: claims-made and occurrence.

Claims-made policies require the policy to be active when the event and lawsuit happened. This means you're only covered if you had the policy in place at the time of the incident.

Occurrence policies, on the other hand, cover any qualified claim resulting from an incident while the policy was active, even if it has expired. This provides more flexibility and peace of mind.