What is professional liability insurance? Almost everyone has heard of medical malpractice insurance, but professional liability insurance is not as well-known. The exact definition of professional liability insurance varies depending on the professional being insured but in general, it protects you against “errors and omissions” that occur when rendering professional services. Basically, it safeguards you against mistakes or negligence that result in a financial loss for your client. It differs from a general liability policy, which is designed to cover bodily injury and property damage claims.
Professional liability insurance covers the cost of legal defense and any judgments or settlements up to the policy limits. Lawsuits can be extremely costly, with damages running into the hundreds of thousands of dollars in a major suit.
Professional liability insurance goes by a number of different names and can be applied to a wide variety of professions. Here are three of the more common types of professional liability insurance:
- Malpractice insurance: This coverage is designed especially for medical professionals. It protects against suits that allege negligence or mistakes. Anyone working in the healthcare industry should consider a malpractice policy and may actually be required to carry it.
- Errors and omissions liability insurance (E&O insurance): This type of coverage is ideal for lawyers, consultants, real estate agents, stockbrokers, insurance agents, designers, architects and others. These professionals offer their advice and knowledge to earn a living. Clients who act on that advice, whether it be buying a certain type of insurance or purchasing a particular stock, are at risk and may feel that the service provided resulted in a financial loss.
- Directors and officers liability insurance (D&O insurance): This coverage is specific to high-ranking executives in a company. It handles a variety of circumstances, including unlawful acts, poor investment decisions, the release of confidential information, issues with hiring and terminations, gross negligence, conflicts of interest and other errors.
- Fiduciary Liability – Fiduciary covers claims that involve the violation of the Employee Retirement Income Security Act, or ERISA. If a manager, for example, violates the financial obligations of ERISA, having the right coverage can protect your company if held liable in situations from imprudent investments to failure to enroll employees.
- Employment Practices Liability Insurance – With proper insurance, your business can be protected if a worker claims that his or her rights have been violated. This can include violations of sexual harassment and discrimination to violations of the Americans with Disabilities Act (ADA), mismanagement of employee benefit plans, and wrongful termination.
Professional liability insurance comes in two different variations, claims-made, and occurrence. A claims-made policy must be in effect not only when a lawsuit is filed, but also when the incident that prompted the lawsuit took place. This is the most common type of policy and is usually more cost-effective.
Occurrence coverage covers any incident that takes place during the coverage period, even if the suit is filed after the policy has expired. These policies provide more comprehensive coverage but tend to be less competitive regarding pricing.
How Do I Get Professional Liability Insurance?
Unfortunately, people are quick to sue and it should be clear by now that carrying a professional liability policy is essential to protecting your business and personal assets. When shopping for a professional liability policy, one of the first things to consider is the claim limit. The amount of coverage needed can vary and can also have required limits.
Another factor to consider is defense costs. Some policies subtract the cost of your defense from the claim limit, which leaves less money available to pay judgments. Other policies pay for defense costs on top of your claim limit. Finally, check for a loss of earnings clause. Policies that offer this benefit pay for the time that you spend in court, while policies without it will not cover those costs.
Costs for professional liability insurance can vary widely depending on the work that you perform as well as the carrier who is writing the coverage.
What Kind of Professionals Can Be Sued?
The list of professionals who can be sued by their clients is endless, but some are more likely than others to find themselves in court. If you fall on this list, professional liability insurance is a must. In many states, doctors and attorneys are required to carry professional liability, but it’s optional for others. Here are a few professionals who should consider professional liability coverage:
- Graphic designers
- Information technology consultants
- Insurance professionals
- Investment advisors
- Management consultants
- Real estate agents and brokers
- Software developers
This list is hardly complete. Anyone in a profession where a mistake can result in a financial loss should consider professional liability insurance. Dentists, wedding planners, transport professionals and even hairdressers can find themselves the target of lawsuits.
Large organizations need to protect their directors and officers. Lawsuits can come from a variety of areas. The 2015 JLT Specialty U.S. Directors and Officers Liability Survey found that 32% of lawsuits were employment-related (hiring and firing), 35% were related to shareholder suits, 18% were fiduciary, and 15% fell under the regulatory banner.
Directors & Officers coverage is available in three different types, Parts A, B, and C; the differences are who is covered under what circumstances. Consult with an independent agent to learn which D&O or personal liability coverage is best suited to your company.
Why Should I Get Professional Liability Insurance?
Just about any professional can be sued. Professionals of all types can benefit from the protection of professional liability insurance. If you are concerned that your company may not support you during a lawsuit, you will want to protect yourself with individual professional liability insurance. For example, if for any reason there is a conflict of interest, your company’s insurance policy won’t provide coverage. The costs of legal defense and possible settlements or judgments may then be taken from your personal financial assets.
Here are a few real-life examples that help answer the question: “Who needs professional liability insurance?”
- Financial advisors: Brokers and financial advisors are especially vulnerable to lawsuits, regardless of the legitimacy of the claim. Lawsuits happen when clients see investments decline, even if they have been advised of the risks. Legal fees can be enormous, even on a false lawsuit, making E&O coverage a necessity.
- Private investigators: These professionals spend a lot of time researching information and digging up data that their clients use to make major decisions. These decisions can involve marriage, employment, or whether to enter into a contract with another party. If any of this information is incorrect, or details were overlooked, it could cause a financial loss to their clients.
- Lawyers: According to the Washington Times, roughly 50% of all malpractice claims in the legal industry involve mistakes related to the law. Common errors are inadequate discovery and not knowing the relevant law. Administrative errors, such as missing deadlines and calendar dates, rank high in one-person firms. Professional liability insurance will protect you regardless of whether the suit has merit.
- Consultants: Business and tech consultants are often at risk for lawsuits. Clients rely on their expertise to make important decisions regarding their business. Tech consultants may make a mistake that shuts down a client’s website or inadvertently introduces a virus into their system, resulting in a lawsuit.
- Contractors: General contractors are exposed to a variety of lawsuit risks. Mistakes and miscalculations can cause time delays and budget issues. Contractors can also be held liable for faulty work done by their subcontractors. A costly lawsuit could easily bankrupt your company if you’re operating without professional liability coverage.
Even if your profession does not fall into these categories, if you provide advice or expertise that could result in a financial loss to your clients, you should absolutely have a professional liability policy. Regardless of whether you are at fault, the risk of a lawsuit is real, and mounting a legal defense can easily bankrupt small or even medium-sized businesses. If you’re not protected by the right type of insurance, both your business and personal assets can be at risk.
Following are a few tips to help prevent lawsuits:
- Be careful: When talking to clients or the public, avoid statements or activities that could be construed as questionable. Improper actions and statements can quickly lead to a lawsuit.
- Find a great lawyer: Make sure you have a lawyer who can advise you on what to say and do if you are sued. Contact them immediately, before making any statements, and trust their advice.
- Protect your data: Protecting your customer data is key. A data loss can lead to legal action from customers or suppliers. Also, consider whether or not Cyber coverage is also a coverage needed to protect your business.
How much does Professional Liability Insurance Cost?
Regardless of industry or policy limits, the average yearly cost of Professional Liability Insurance for a small business is $1,735.60. The median yearly cost is $920.
How much does it cost for insurance for a consulting business?
The most popular plan, though, is the $1 million / $1 million plan — 66 percent of our consultants choose this policy. Regardless of policy limits, the average cost of Professional Liability Insurance for a business consultant is $853.79 per year, with a median cost of $713.00.
Do you need insurance for an LLC?
General Liability Insurance: General liability policies can cover both the LLC and its individual members. In rare cases, when individual members can be sued personally, a general liability policy with enough coverage can be used to pay damages and shield a member’s residence, bank account and other assets.
What does an LLC protect you from?
The main reason people form LLCs is to avoid personal liability for the debts of a business they own or are involved in. By forming an LLC, only the LLC is liable for the debts and liabilities incurred by the business—not the owners or managers.
Our goal at Densmore Insurance Strategies, Inc. is to provide insurance solutions that keep small to medium-sized businesses protected. That is why we combine various coverage options into one convenient package – for more benefits than a typical Business policy and better savings through competitive pricing.
We provide small and mid-sized companies that need a Business Owners Policy to secure their your assets. Our insurance agency provides specialized insurance protection to businesses near Ankeny Iowa, Altoona Iowa, Bondurant Iowa, Des Moines Iowa, West Des Moines Iowa, Johnston Iowa, Waukee Iowa, Grimes Iowa, Polk City Iowa, Pleasant Hill Iowa, Norwalk Iowa, Huxley Iowa, and Urbandale Iowa. We are licensed to serve Iowa, Illinois, Nebraska, Florida, Missouri, Arizona, Texas, and Tennessee.
Contact a representative with Densmore Insurance Strategies, Inc. today to prevent mistakes and errors from becoming major losses for your business.