Professional Liability Insurance: Your Financial Fallback

With knowledge comes power. And with power comes great responsibility. People consult you for information and guidance because they believe that your expert advice is instrumental in helping them make informed business decisions. The best thing to do as a professional is to be conscientious.

However, the brutal truth is that you cannot wholly prevent errors no matter how careful you are. Any negligence on your part can expose you to substantial fines following litigation. Hence, the second-best thing to do is to prepare and protect yourself from any future litigation. How? Through professional liability insurance.

What is Professional Liability Insurance?

Professional liability insurance is a safety net for professionals such as accountants, lawyers, physicians, real estate agents, insurance agents, and so on. A professional is susceptible to client lawsuits on the grounds of negligence, errors, and malpractice. Such lawsuits can be financially exhausting to cover on your own. However, if one has professional liability insurance, the insurer pays legal fees, defense costs, settlement costs, etc.

Debunking the Myth

Myth: Professional liability insurance does not cover frivolous lawsuits.

Reality: It is not uncommon that a professional is blamed based on perceived negligence. Clients can simply allege you of negligence and sue you. Professional liability insurance not only protects you from lawsuits due to real errors you make but also when you are not at fault. Additionally, it also covers legal expenses for suits that never make it to court.

Professional Liability Insurance in Different Forms

Often called professional indemnity insurance, professional liability insurance is available in different forms as per your profession.

Errors and omissions (E&O) insurance

E&O insurance is tailored for any professional offering services such as insurance agents, doctors, lawyers, accountants, investment advisors, etc. This insurance covers your legal and settlement costs following any lawsuits of errors, omissions, or negligence. E&O insurance is specialized to suit the needs of different professionals. For instance, an E&O policy for a lawyer is different than one for a landscaper.

Malpractice insurance

Healthcare workers and lawyers are the primary buyers of malpractice insurance. For instance, a patient may sue a healthcare professional for prescribing an incorrect dosage of their medications, resulting in a sudden deterioration of their health. Medical malpractice insurance covers medical damages, punitive damages, and legal costs. You can get malpractice insurance from a private insurer, your employer, or risk retention groups.

Directors and Officers (D&O) insurance

D&O insurance, also called management insurance, is for directors and officers of a company. The insurance is position-oriented rather than industry-oriented. It protects the directors and officers of a company against lawsuits arising from negligence, omissions, or misconduct. Investors, employees, customers, competitors, or other parties can file such lawsuits. Furthermore, D&O insurance saves the personal properties of the insured.

Employment practices liability insurance (EPLI)

Although not professional liability insurance, EPLI coverage can be bundled into your insurer’s professional liability policy. Employment practices liability insurance covers businesses against lawsuits by employees on the grounds of unfair or illegal conduct. This includes lawsuits arising from allegations of sexual harassment, discrimination, wrongful termination, etc.

Do You Need Professional Liability Insurance?

If you’re a professional who provides consultations and professional services to clients, it is wise to purchase professional liability insurance. You never know when a client may file a lawsuit against you due to a real or perceived error.

For instance, according to the Insurance Information Institute (III), most American doctors face more than one medical malpractice lawsuit during their careers. Adding to it, a study by the Statista points that in 2019 the direct losses of medical malpractice insurance amounted to $5.47 billion in the U.S. and Canada. Also, even with decades of knowledge and experience, there is a higher chance that as a professional you will eventually be involved in costly lawsuits.

If you can transfer the risk of potential lawsuits by simply paying a few extra dollars, protecting yourself through professional liability insurance would be wise. Add to it that some clients may require you to have professional liability coverage before retaining your services.

Professional Liability Policy Types

You may buy professional policies that cover on a claims-made basis or an occurrence basis.
The most common type is the claims-made policy. To be covered, the incidence and the filing of the lawsuit should happen when the policy is in effect. If not, claims will not be paid by your professional liability insurance.

If you are changing careers or planning to retire, the suitable option is to go with an occurrence policy. Under this policy, the insurer covers you even if a lawsuit is filed against you after its lapse. However, the cause of the case should have been in effect during the policy period.

Coverages of Professional Liability Insurance

Professional liability insurance covers the following:

Undelivered services

Suppose, as a marketing consultant you design an ad campaign for a client. However, the campaign fails to attract the promised potential number of leads and your client sues you. If you’ve promised to deliver a particular level of service, but are unable to, your client can sue you. In such cases, the insurance covers liability and legal costs.

Missed deadlines

If you cannot complete the work by a pre-determined deadline, your client can sue you. For instance, as a freelance writer, you have a contract to draft a project proposal for your client. Unfortunately, you miss the deadline due to factors outside of your control. As a result, the client loses a huge opportunity, causing a loss in business. Your client sues you for missing the agreed-upon deadline, and your insurer indemnifies such lawsuits over late work.

Other errors in judgment can be disclosing material facts, authorizing misleading reports, not taking corrective measures to solve issues, etc. The D&O insurance indemnifies suits filed on such grounds.

Malpractice and Omissions

Imagine you’re a lawyer. You overlook a vital piece of evidence that would’ve saved your client from losing their case. As a result, your client files a malpractice suit against you. Your professional liability insurance covers up to the policy limit for any lawsuit inflicted due to omissions or malpractice.

Negligence

Professional liability insurance covers lawsuits arising from negligence. For instance, as a construction contractor, you order an expensive material to use in a project. However, you unexpectedly cannot use the material, adding to the client’s expense. Your client can sue you for financial loss.

Errors

A simple mistake can result in a significant loss to your client. For instance, you are an accountant. You make an incorrect entry in your client’s books, leading to a wrong budget calculation. Following the error, the client may sue you for such an error. That’s when professional liability insurance kicks in as it covers such cases by compensating for legal fees and settlement costs.

Overall, a professional liability policy pays for the legal defense costs, settlement costs, personal injury claims from the injured client or third-party, copyright infringement lawsuits, etc.

Exclusions You Should Know

It is as essential to know the exclusions as it is to understand the coverages.

Prior-knowledge exclusions

Since a claims-made policy is a typical purchase, some moral hazards are inherent. A person or business may purchase professional liability insurance after making an error, leading to an actual lawsuit. As a result, insurers apply a prior knowledge exclusion to protect themselves against such claims. If in the process of resolving a claim, the insurer learns that the insured had prior knowledge and knew that they were going to be sued prior to having coverage, the insurer will not cover the claim.

Fraud

Insurance doesn’t cover any losses caused intentionally by the insured, such as losses due to any dishonest, malicious, illegal, or criminal acts leading to lawsuits. No insurance covers activities that violate a law, regulation, ordinance, or statute.

Securities or intellectual property

Securities and intellectual properties have inherently higher risks. Generally, professional liability insurance excludes indemnification for security or intellectual property related works. However, if your job involves either of these, you can add it via endorsement.

Commercial Cyber liability

Cyber-related errors that result in cyberbullying, loss of data, identity theft, etc. are outside the scope of professional indemnity insurance. However, there is a specialized policy that extensively covers your cyber-related risks—commercial cyber liability insurance. It protects your losses as well as the liability losses you face.

Cost of Professional Liability Insurance

There is no fixed cost for a professional liability policy. The premium you pay depends on various factors.

Type of business

The level of risk is classified based on the type of business. The higher the risk, the higher the premium. If your profession has high exposure to professional liability lawsuits, your premium is bound to be more costly than an average policy. For instance, an architect working in high-value construction projects will need to pay a higher premium. While a contractor working in low-valued projects needs to pay lower premium.

Claims history

A higher number of claims reflect a more significant risk. Businesses or professionals with multiple claims pay a higher premium than those with zero claim history.

Risk management practices

The risk management tools and techniques you implement can bring down the cost of your policy. To clarify, risk management efforts reflected in billing processes, reporting methods, etc. lessen the risk exposure of errors and lawsuits. Hence, businesses and professionals that practice comprehensive risk management have lower professional liability insurance costs.

Hours of operation

A professional working more hours has higher risks. For instance, a part-timer has fewer chances of making errors than a full-timer. Typically, the former is charged a lower premium than the latter.

Though the cost of professional liability insurance is not fixed, you can start by getting a quote.

Tips to Lower Your Premium

These quick tips can help you bring the cost of insurance down:

• Obtain multiple policies from the same insurer.
• Pay higher a deductible. They generally range from $1,000 to $25,000.
• Choose an insurer who is specialized in insuring your industry.
• Practice risk management techniques such as internal accounting control to reduce embezzlement or employee fraud.

Which Insurances Include Professional Liability Insurance?

You can buy professional liability insurance in various industry-specific insurance packages. These include:

• Contractors insurance
• Handyman insurance
• General contractor insurance
• Church insurance
• Entertainment insurance
• Beauty insurance
• Construction insurance
• Engineer insurance
• Art insurance
• Consultant insurance
• Photography insurance
• Personal trainer insurance
• Real estate insurance

Has this article been helpful to you? Leave a comment below and share your thoughts with us. Get in touch with a local insurance agent today.