As a professional, you often give advice and make recommendations. But what happens when you accidentally make an error or omit something vitally important?
Everyone makes mistakes now and then. Unfortunately, your professional mistakes may cost you. If your mistakes results in a financial loss for your client, you could be sued for professional negligence.
Professional liability insurance can help mitigate the costs associated with defending yourself against a lawsuit. Here are seven things that you should know about this commercial insurance policy.
How Professional Liability Insurance Works
Professional Liability Insurance (PL) is a type of insurance policy written for professionals who use specific knowledge in order to provide their clients with services. It is often referred to as Errors and Omissions (E&O) Insurance or Professional Indemnity Insurance.
Professional liability helps pay for certain legal costs, which can include defense costs and judgment awards, when a client brings forth a lawsuit.
PLI policies are generally available in multiples of one million and have deductibles that range from $1,000 to $25,000 (the exact deductible is dependent on the specific policy and the insurance carrier).
There are Different Types of Professional Liability Coverage
Professional liability coverage is designed to protect professionals, such as accountants, real estate brokers, consultants, and other people who provide a service to clients. However, some professionals aren’t covered by a general professional liability policy and need a specialized form of E&O coverage, instead.
Professional Liability Insurance
If you work outside of the medical industry as a sole-proprietor or business owner that provides a professional service, like a real estate agent, lawyer or accountant, you will need a general professional liability insurance policy.
Medical Malpractice Insurance
If you’re a medical professional such as a physician or surgeon, medical malpractice insurance is a specialized type of professional liability designed to cover you for liability arising from services that result in a patient’s injury or death.
Architects & Engineers (A&E) Liability Insurance
Architects, engineers, interior design firms, and surveyors need a specialized form of liability insurance that insures these design professionals against errors and omissions in their work. (A&E policies normally exclude coverage for faulty construction work associated with projects.)
Lawyers Professional Liability Insurance
Law firms and attorneys require a specialized form of professional liability that can offer coverage against allegations that commonly occur in the legal arena, such as personal injury perils (defamation or invasion of property) in addition to coverage for financial loss suffered by a third party from acts, errors, and omissions in providing a legal service.
What Mistakes Does PL Cover?
When you purchase a professional liability insurance policy, it generally covers unintentional mistakes that result in a financial loss to your client, including:
- Professional mistakes
- Omitting information
- Giving bad professional advice
- Performing acts that could be considered negligent
- Misrepresenting yourself to a client
Who Needs Professional Liability Coverage?
Individuals who provide professional services typically need professional liability insurance. As a general rule, if you provide a service to clients, PL is for you.
Common professions include:
- Accountants
- Architects
- Brokers
- Contractors
- Counselors
- Engineers
- Graphic designers
- Individuals who work in financial sectors
- Insurance agents
- IT professionals
- Journalists
- Producers
- Professional consultants
- Real estate agents
What’s not Covered by Professional Liability?
Professional liability insurance only protects you for mistakes made while performing a service for a client. It generally does not cover accidents or incidents on your business property that result in someone getting injured. If you are worried about physical injuries, you will need to purchase a general liability insurance policy that covers injuries on your property.
Professional liability insurance is also not typically designed to financially protect you if you are caught conducting criminal activities in relation to your business or if you commit fraud.
It also doesn’t typically cover misleading or fraudulent advertising or matters related to intellectual property.
Which Coverage is Right for You?
You can choose from two types of professional liability policies: claims-made and occurrence.
Claims-made: Most professional liability policies are claims-made. In order for the policy to pay, it must be in effect both when the event took place and when the lawsuit is filed.
Occurrence: Protects you from any incident that occurred when the policy was in effect, no matter when the lawsuit is filed.
Claims-made policies are generally more cost-effective compared to an occurrence policy. Claims-made policies can also have a tail added to extend the coverage period. A tail, or ERP (extended reporting period), is an endorsement that becomes active after your coverage has ended. A tail endorsement allows you to report claims that occur after the policy has ended - as long as the incident occured while your policy was in effect.
With an occurrence policy, however, the benefits are permanent. You do not need a tail after canceling the policy, which could protect you after your retire or if you change careers.
Lawsuits Can Cost You. A Lot.
Imagine being sued for professional negligence and having the case drag through the court system for several years. When the case finally reaches resolution, the jury awards your former client millions of dollars in damages. This scenario is entirely possible.
When you have a professional liability insurance policy, the costs of the lawsuit are covered up to your policy limits, minus your deductible.
For example, if you have a 5 million dollar policy with a $25,000 deductible, you would be responsible for paying the $25,000. Your insurance provider would pay for any legal costs and judgments up to the 5 million dollar policy limit.
Without a professional liability policy, you would be responsible for paying 100 percent of the costs associated with the lawsuit.
Your professional liability insurance policy should be tailored to your professional needs and specific industry so that you are fully covered in the event that one of your clients accuses you of giving them bad professional advice or not living up to the expectations of the provided service.
Speaking with a qualified, experienced insurance agent can help you choose the correct policy.
While we all want to provide them best possible services for our clients, mistakes and misunderstandings happen. Professional liability protects your business, and your bottom line, with coverage that can save you from paying out of pocket when the mistake made is yours.