What Is Professional Liability Insurance?

Professional liability insurance is commonly purchased by professionals and service providers to protect against claims of financial loss due to a failure to meet their profession’s standard of care.

Professional liability, also referred to as errors and omissions insurance, typically covers negligence, errors, omissions, and other mistakes you may make that could financially harm a client. This type of policy helps pay for your legal defense and any settlements or judgments that must be paid, subject to the limits of the policy.

In general, liability insurance compensates someone else for losses or damages. Professional liability is a kind of indemnity insurance.

Certain professions have known liability exposures and corresponding coverage, such as medical malpractice insurance for doctors and nurses and legal malpractice insurance for attorneys. Architects, engineers, financial advisors, consultants and accountants also typically need professional liability insurance.

But virtually anyone who provides a service could find themselves defending a liability claim if they fail to meet a client’s expectations, miss a deadline or deliver a substandard work product. For example:

• A commercial landscaper may install the wrong species of plant.
• A graphic designer may make a mistake in a marketing brochure.
• A florist might fail to deliver the right arrangements for a big wedding.
  In each of these cases, there could be damages that result in an errors and omissions claim.

Any time you fail to meet the standard of care exercised by a reasonable person in your profession facing the same or similar facts and circumstances, you run the risk of a liability claim. Professionals who are licensed and have a fiduciary duty are especially vulnerable to claims. In many cases, a liability policy for these professions will include coverage for breach of fiduciary duty, lack of regulatory compliance or negligence.

Some types of claims aren’t covered. These include intentional and dishonest acts, general liability (such as slips and falls), employment practices liability, cyber liability and faulty workmanship. Policies also might not cover a breach of contract. All policies have deductibles and limits.

The difference between professional liability and general liability

An important distinction to remember with liability coverage is that commercial general liability (CGL) insurance, which is carried by most businesses, doesn’t pay for errors and omissions claims. Professional liability is excluded from CGL policies.

What CGL does cover is bodily injury, property damage, medical expenses, and personal and advertising injury claims when someone other than an employee is harmed as a result of a business’s operation. For example, a customer might get injured on your premises or an employee could accidentally damage a customer’s property. Most CGL claims arise from physical damage, but CGL also covers copyright infringement, accidental use of another person’s intellectual property, misleading advertising claims, and libel and slander.

Policy considerations

There are several things to consider when purchasing professional liability insurance. You must decide how much coverage you’ll need and how claims are to be paid. The amount you should purchase depends on your profession and the type of work you do, as well as your firm’s location, the number of employees you have, your annual revenue and your claims history.

Policies are sold with limits, which is the maximum the policy will pay out. There are two kinds of limits: an occurrence limit and an aggregate limit. The occurrence limit is the most the policy will pay for a single claim, and the aggregate limit is the most a policy will pay out during the policy term (usually a one-year period).

Most professional liability policies are written on a claims-made basis. Only claims made while the policy is in force will be covered. Since an error or omission might not be discovered right away, you’ll need to continue your policy for an extended period of time. If the policy is no longer in force when the claim is made, it won’t be paid.

You’ll want to review your professional liability risk exposure with an insurance broker. Here are a few things to discuss with your broker:

• Who pays for the policy? In some professions, employees are covered by their employer’s professional liability policy. However, these policies might not protect you as much as an individual policy, and the insurance company will likely put the employer’s interests above your own. Your employer’s liability policy also won’t cover you for any outside work or volunteer activities you perform.
• What’s in the insurance contract? Check if the language in the insurance policy preserves your right to consent to a settlement. Also beware of “hammer clauses,” which make you responsible for paying the difference if the insurer recommends settling at a lower amount and you decide to go to trial.
• Does the insurer have experience in your industry? Make sure you choose an insurance carrier that has experience defending liability claims in your profession and can provide expert witnesses to testify on your behalf.
  Of course, the best defense is to avoid a claim altogether. You can lower the likelihood of a claim and reduce your premiums by following industry best practices. Instituting procedures to reduce errors, prevent negligence, review contracts and keep projects on schedule can go a long way toward eliminating costly liability claims.

Take the steps necessary to reduce your risk of a professional liability claim and get the coverage your business needs. An insurance broker can help you find the right policy to give you peace of mind.

This content is for informational purposes only and not for the purpose of providing, financial, medical or legal advice. You should contact your attorney, doctor, broker or advisor to obtain advice with respect to any particular issue or problem. Read more about our limitation of liability here.