Professional liability insurance provides coverage to professionals who offer expert advice or services. Missed goals, poor communication, or mistakes in work can lead clients to believe that they have been cheated.
While claims may arise from a variety of different causes, there are three main categories of risk that E&O coverage will protect you from:
- 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.
- Negligent services: Standards of quality are often set by state laws, industry norms, or contractual obligation. If the work you provide doesn’t live up to these expectations, your client could sue you for negligence.
- 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.
Example of a Professional Liability Claim
A real estate agent recommends that her clients list their home for $400,000 based upon 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 clients find out about the large discrepancy in price and accuse 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 she has still accrued a hefty attorney’s bill.
As you can see, a claim does not have even 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.
While E&O coverage is essential for professionals and service businesses, it is not considered a “broad insurance policy,” as it is targeted and specific in its protections.
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.
The average cost of a professional liability insurance policy is about $500 - $1,800. This is a very broad range of pricing, because there are many variables in the policy features that can make considerable differences in cost.
The feature that makes the largest change in premium is the policy limit. On average, doubling the policy 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 are:
- Number of employees
- Age of business
- Claim history
How much will the right insurance cost you?
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If your businesses provides a professional service or expert advice to a client, chances are that you need E&O coverage.
Certain professionals like attorneys, real estate agents, or those in the medical field are often required by state law to carry professional liability insurance.
Situations that may require you to carry E&O insurance:
- 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 also have a substantial exposure from advice they offer to their customers and clients.
Professional liability insurance is there to protect your financial assets in the event of a lawsuit, but 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:
- 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 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.
- Business structure: 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
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 insurance policy. Be sure to clarify that this is in your policy when you get a quote.
Is malpractice insurance considered professional liability?
Yes, professional liability insurance goes by many names, but it is generally the same concept across industries. Other titles may be malpractice, E&O, and professional indemnity.
Are professional liability insurance and general liability insurance the same thing?
No. General liability insurance is a “broad insurance policy” that covers risks like bodily injury and property damage.
Most small businesses have a need for general liability insurance, as it lays a great foundation of protection for the company.
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.