As a business professional, you are responsible for the knowledge, expertise and services you provide to clients. As a result, clients can take legal action against you and your firm when they believe mistakes that harmed them financially were made when you provided your services. Under these circumstances, professional liability insurance can help cover your legal costs.
What is professional liability insurance?
Professional liability insurance (also known as professional indemnity insurance) provides businesses with coverage against clients' legal claims of negligence, malpractice and misrepresentation. The insurance can help cover the monetary costs associated with legal fees, judgments against you, settlements, compensatory damages, punitive damages, and economic or business damages that result from a lawsuit.
General liability insurance
General liability insurance provides coverage against claims that can arise when a third party is injured (e.g., a customer trips on the carpet in your store and hurts their arm) or property is accidentally damaged on your premises. It also covers damages that an employee causes on the premises of a third party. However, general liability insurance does not protect against claims that relate to professional or business practices, which would be covered by professional liability insurance. [Discover which types of insurance are best for your business.]
Who needs professional liability insurance?
Business owners and professionals who have expertise in a certain area (e.g., lawyers, accountants, consultants, graphic designers) need professional liability insurance to protect their business against clients' claims of negligence. Professional liability insurance is required particularly if the business owner or professional meets any of these criteria:
- Signs a contract that requires insurance coverage
- Provides professional services directly to clients
- Regularly offers advice to clients
Healthcare professionals
Healthcare professionals (namely, physicians) require medical malpractice insurance, which is a specific type of professional liability insurance. This insurance protects against claims from patients who believe they were harmed by the medical professional's negligence or intentionally harmful treatment decisions. The insurance also provides coverage against claims that arise from the death of a patient.
Errors-and-omissions insurance
Some professionals require errors-and-omissions insurance, which is another type of professional liability insurance. This insurance provides coverage for claims that a professional made a mistake in providing services or advice that caused financial or business difficulties for the client. Some states and licensing boards require certain types of businesses to have errors-and-omissions insurance coverage. Some business professionals (e.g., real estate agents, accountants) also benefit from having this type of insurance coverage.
What does professional liability insurance cover?
Professional liability insurance provides coverage for the following types of claims:
- Negligence
- Misrepresentation
- Inaccurate advice
Professional liability insurance covers clients' claims of wrongdoing made during the policy period. Policies are usually arranged on a claims-made basis, wherein insurance coverage applies only to claims that are made during the policy period. A typical professional liability policy protects the insured against financial loss that arises from a claim made during the policy period for a covered error, omission or negligent act that takes place in the conduct of the insured's professional business.
Ordinary vs. professional negligence
A client can accuse any business or individual of ordinary negligence (e.g., the person slips and falls on the sidewalk in front of the business, resulting in an injury). This type of liability applies to claims that a business has not abided by duty and care if a client suffers from physical or financial harm that results from carelessness. Businesses or individuals can be sued for ordinary negligence if they do not take the same amount of care as any reasonable person would to avoid harming others.
When a client hires a professional for their specialized skills or experience, they must meet a higher duty or standard of care than a person without this specialized knowledge. Otherwise, they could be held liable for professional negligence if a client experiences physical or financial harm because the professional did not abide by this higher standard. Here are some examples:
- An accountant failing to file a client's tax return on time
- An engineer causing a project to be delayed or incur higher costs than planned
- An insurance professional misrepresenting the type or amount of insurance coverage provided in a plan
- A real estate agent failing to notify a buyer of a defect in the home
There are two methods for measuring a professional's duty of care:
- Foreseeability tests determine if you could have reasonably predicted your actions would hurt the client (e.g., you should know that missing a deadline would lead to your client being fined).
- Multifactor tests evaluate several factors, including the extent of the damages, the possibility of taking another action, the cost of taking that other action and the safety of the alternative options.
Misrepresentation
Misrepresentation occurs when professionals make false statements of material facts that affect a client's decision when agreeing to a contract. If the misrepresentation is discovered, the contract can be declared void and the client can seek damages. For example, a business consultant could be charged with misrepresenting themselves to a client by stating they have experience in an industry when, in reality, they do not.
There are three types of misrepresentation:
- Innocent misrepresentation occurs when the person making a false statement of material fact was not aware that the statement was untrue.
- Negligent misrepresentation occurs when the person who made the statement did not try to verify the statement was true before executing a contract.
- Fraudulent misrepresentation occurs when the person knew the statement was false when they made the statement or they recklessly made the statement to get the other person to enter a contract.
Exclusions
Professional liability insurance does not cover the following:
- Criminal prosecution
- Some forms of legal liability under civil law that are not listed in the policy
- Bodily injury or property damage (these types of claims are covered by a general liability insurance policy)
- Work-related injuries or illnesses (these types of claims are covered by a workers' compensation insurance policy)
- Data breaches (these types of claims are covered by a cyber-insurance policy)
Claims period
Many insurance companies provide professional liability insurance on a claims-made basis. The policy covers claims made within a specific period of time, and may include the following:
- A retroactive date, which covers you for incidents that happen on or after the specified date in your policy
- An extended reporting period, which covers claims that occur within a certain time (e.g., 30 to 60 days) after your policy expires
Specific wording
Some professional liability insurance policies have specific wording for what is covered. For example, the insurance policy might include "breach of duty" if the policyholder reports the incident to the insurer during the policy period.
Coverage for "negligent act, error or omission" protects you against loss or circumstances that occurred only as a result of a professional error, omission or negligent act (i.e., "negligent" does not apply to all three categories). A "negligent act, negligent error or negligent omission" clause is more restrictive and would not cover a lawsuit in which a client claims a non-negligent error or omission.
How much does professional liability insurance cost?
Several factors can affect the cost of your professional liability insurance:
- Coverage limits: Higher coverage limits expose the insurance company to potentially higher-cost lawsuits, so the costs of the insurance premiums will also increase.
- Type of business: Some types of businesses and individuals (e.g., lawyers, doctors) face higher standards and incur more lawsuits than other industries, which means they pay higher professional liability insurance premiums.
- Business size/number of employees and clients: Businesses with more employees and clients typically require more professional liability insurance coverage than single-person ventures.
- Location: Insurance providers price professional liability insurance according to state insurance regulations and typical loss exposures in those states.
- Experience/years in business:More-experienced professionals may pay less for insurance than a relative newcomer, as they will have built up trust with their insurance provider and clients.
- Claim history:Businesses or products with a history of claims have a higher risk of potential lawsuits for the insurance provider, which increases the costs of professional liability insurance.
When you get quotes for professional liability insurance, show what you have done to maintain your professionalism, expertise and knowledge of your business. Provide the insurance company with business documentation, such as the following:
- Copies of contracts with current clients
- Documentation procedures
- Information on previous professional liability insurance coverage
- Processes that demonstrate quality control (where applicable)
- Employee training initiatives
How do you show proof of a professional liability insurance policy?
You might be required to show proof of professional liability insurance when signing a contract with a new client or to verify that you have specific coverage. To show proof of professional liability insurance, you typically need a certificate of insurance (COI). A COI is a document that contains important information about your insurance policy and acts as verification of insurance and proof of specific insurance coverage.
A COI should include the following:
- The name of the policyholder
- The effective date of the policy
- The type of coverage involved
- The policy's limits
Requesting a certificate of insurance
To request a COI, contact your insurance company or broker and provide the following information:
- Contact information
- Policy number
- The certificate holder's name
- The certificate holder's contact information
- The information of other individuals or companies to be listed on the certificate
- A copy of the insurance requirements or contract