Professional Liability Insurance for Small Business

If you provide professional services or expert advice to customers, your business needs professional liability insurance coverage.

Also known as errors and omissions insurance (E&O coverage), this type of small business insurance protects business owners against claims of inaccurate, negligent, or undelivered work.

Regardless if you have a legal defense to claims, E&O policies help cover the costs associated with these disputes. Use our guide to estimate your annual professional liability insurance cost and find a provider.

Recommended: Next Insurance is dedicated to matching small businesses with the right professional liability policy at the best price. 

How Much Does Professional Liability Insurance Cost?

The average cost of professional liability insurance is about $500–$1,800 per year. There are many variables in the policy features that can make considerable differences in cost.

One key variable that plays a deciding factor in the cost of a professional liability policy is the claim limit. On average, doubling the liability claim limit will almost double the price per year of the policy. So, a $2 million policy will generally be roughly double the price of a $1 million policy.

Some of the other factors that affect policy price include:

  • Industry
  • Location
  • Number of employees
  • Age of business
  • Claims made with a previous policy
  • Other policies held

Depending on your insurance company, you may be eligible for policy discounts based on other types of small business insurance coverage held.

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What Does Professional Liability Insurance Cover?

Risks typically associated covered by a professional liability insurance policy include:

  1. Inaccurate Work: If you or an employee make a mistake that costs your client money, they may have grounds to bring suit against you to recoup their losses.
  2. Malpractice: Mistakes and professional negligence in many industries can lead to liability claims if services don’t live up to standards of quality often set by state laws, industry norms, or contractual obligations. 
  3. Misrepresentation: Also known as indemnity insurance, policies protect businesses from statements that your business has made about key factors of a product or service that are later found to be inaccurate.
  4. Undelivered Results: Contracts can sometimes contain clauses related to effects on the client’s business after work is completed. If a certain degree of growth, sales, profit, etc. isn’t reached, the client may have grounds to pursue any funds they expected to receive.
  5. Personal Injury: Claims involving certain personal injuries like libel or slander may be covered in your policy.

Example of a Professional Liability Claim:

A real estate agent recommends that her clients list their homes for $400,000 based on her research. The clients agree, and the listing contract is signed.

The home receives a full-price offer on the same day it goes on the market, and the agent says that it is a great offer and the clients should sign. The clients are excited that things are moving quickly and sign the sale contract.

A week after the sale is completed, a similar house in the same neighborhood goes under contract for $450,000. The client finds out about the large discrepancy in price and accuses the agent of undervaluing their home. They claim that the agent was working only in her own interest to make a commission as fast as possible.

In the pursuing legal battle, the agent proves that her research was correct, but now she still has a hefty bill for legal defense costs.

As you can see, a claim does not even have to be substantiated to cause a huge financial impact. E&O coverage is there to make sure that situations like this don’t completely devastate your business.

What is Not Covered With a Professional Liability Insurance Policy?

While E&O coverage is essential for professionals and service businesses, it is not a replacement for a "broad insurance policy" like general liability insurance as it is very targeted and specific in its protection from professional errors.

Note: Many liabilities that are not covered by an E&O policy fall in the territory of general liability insurance. All businesses have a need for general liability coverage and used together, these two insurance policies will create a strong base of protection for your small business.

Aside from risks covered by other types of policies, there are also cases that a professional liability insurance policy would not cover:

  • Illegal Activities: If you or an employee are found to have broken any law in completing work for a client.
  • Intentional Malpractice: If it is proven that you or an employee intentionally cause harm to a client or project.
  • Discrimination: If a client claims that you or an employee treated them unjustly based upon their belonging to a protected class.
  • Punitive Fines: Damages awarded in addition to actual damages meant to punish the defendant.

Do I Need Professional Liability Insurance Coverage?

If you provide a professional service or expert advice to a client, your business needs professional liability insurance.

Certain business professionals like attorneys, real estate agents, or those in the medical field are often required by state law to carry professional liability insurance coverage and malpractice coverage.

Other situations that may require you to carry errors and omissions insurance include:

  • Membership in certain professional associations
  • Client contracts
  • State or local laws

There are many professions, such as doctors and lawyers, that obviously have a need for professional liability insurance, but there are other industries that may surprise you. Beauty professionals, IT consultants, and marketing companies could also benefit from professional liability coverage to mitigate the risks associated with advice offered to customers and clients.

Next Insurance is a fully online provider dedicated to low-cost, high-protection professional liability coverage for small businesses. Get an accurate quote instantly.

Tips to Avoid a Professional Liability Claim

Professional liability insurance offers financial protection in the event of claims against your service-based business. However, it is always better to avoid claim situations rather than let insurance take care of the aftermath of a dispute.

Ways to avoid professional liability E&O claims include:

  • Processes and Procedures: Having thorough plans and oversight in place will help ensure that the quality of work produced is high and the chance for mistakes is low.
  • Solid Contracts and Client Agreements: The basis of any strong relationship is good communication. Be sure that both you and your clients are on the same page when it comes to professional services goals, projections, and requirements. Have these specifications well documented to be sure that there is no room for misunderstandings in the future. We offer free legal documents to help keep set up some of these agreements.
  • Formal Business Structures: While it may not directly help avoid claims, having your business structured as an LLC will shield your personal finances from the effects of a judgment against your business.

FAQs

What is professional liability insurance?

As a service-based business, you are exposed to a different set of risks that other businesses may be exempt from. In addition to other types of business liability coverage, having a professional liability policy can protect your business from various claims made including, but not limited to:

  • Quality of work
  • Errors in advice
  • Missed deadlines

Whether justified or not, clients can take legal against your business, putting your business assets at risk. Service-based businesses can get a professional liability insurance quote in just a few minutes with Next Insurance.

Are professional liability insurance and general liability insurance the same thing?

No. General liability insurance is a broad type of business policy that would cover claims related to bodily injury and property damage. 

Learn more about general liability insurance with our guide.

Is professional liability included in a business owner’s policy (BOP)?

No. A typical business owner’s policy includes general liability insurance, property insurance, and business interruption insurance. Professional liability insurance would require its own policy.

Am I required by law to carry general liability insurance?

In most cases, no, your LLC is not required by law to carry professional liability insurance. Only certain professions like doctors and lawyers are required to maintain professional liability coverage. Research your state and local laws to learn which types of small business insurance your company is required to have.

Are part-time employees and subcontractors covered by my policy?

In most cases, yes, part-time employees and subcontractors fall under the coverage offered by your professional liability policy. Be sure to clarify that this is in your policy when you get a quote.

Is malpractice insurance considered a professional liability?

Yes, professional liability insurance goes by many names, but it is generally the same concept across industries. Other titles may be malpractice insurance, E&O insurance, or professional indemnity insurance.

Could a lawsuit reach into my personal assets as well as my business assets?

Possibly. An LLC isn’t necessarily an impenetrable entity and may not protect personal assets in the event of a claim. The answer to this question is more of a legal matter than an insurance one. 

Read our article on maintaining your corporate veil, and consult with your attorney about which of your assets could be exposed.

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