Professional liability insurance — also known as errors and omissions (E&O) insurance — is a safety net that financially protects your business from issues related to malpractice or negligence. Whether you're a seasoned veteran or an emerging professional, understanding professional liability insurance can mean the difference between financial security and unexpected losses.
How Professional Liability Insurance Works
Professional liability insurance (PLI) is a form of business insurance that provides essential financial protection for professionals who provide services. In case of negligence or malpractice claims, professional liability insurance covers the legal costs and potential settlements that can arise from these claims, safeguarding an individual's or business's finances.
PLI coverage comes in two main types: claims-made and occurrence policies.
- A claims-made policy covers incidents that occur and are reported while the policy is active. With this coverage type, you must have a live policy to reap the benefits of PLI protection.
- An occurrence policy covers any incident within the policy period, regardless of when the claim is filed. For example, an occurrence policy would still provide coverage for claims filed after the policy has ended as long as the error was made during the active policy period.
Professionals should choose from these policy types according to their specific risk profiles and needs.
What Professional Liability Insurance Covers
Professional liability insurance covers financial losses related to the professional services or advice a business or individual provides, including the legal costs of defending against these claims. Here are some typical claims covered by PLI:
- Negligence: Claims arising from mistakes or failure to perform professional duties — such as a doctor misdiagnosing a patient or an architect designing a faulty structure.
- Misrepresentation: When a professional is accused of providing misleading or incorrect information — for example, a financial advisor giving inaccurate investment advice.
- Violation of good faith and fair dealing: If a professional is accused of not acting in their client's best interest, such as an insurance agent failing to process a client's claim.
- Defamation or libel: Includes claims for damaging a person's reputation, such as a public relations consultant spreading false information about a client.
- Breach of contract: Situations where a client accuses the professional of failing to fulfill the terms of their contract — for example, a consultant not delivering the promised services within the agreed timeframe.
What Professional Liability Insurance Doesn’t Cover
Although professional liability insurance provides essential protection, it has limitations. This type of business insurance typically does not cover the following liabilities:
- Intentional misconduct: Deliberate or fraudulent acts — such as knowingly providing incorrect advice or enacting purposeful harm — are not covered.
- Bodily injury or property damage: These are typically covered by general liability insurance, not professional liability insurance. For instance, professional liability won't cover if a client slips and falls in your office.
- Workplace disputes: Claims such as employee discrimination, wrongful termination or harassment are not covered. These are generally covered by employment practices liability insurance (EPLI).
- Personal data breaches: Professional liability insurance will not typically help if sensitive customer information is lost or stolen. Cyber liability insurance is designed for this purpose.
- Employee injury and illness: Professional liability insurance does not cover claims related to injuries or illnesses that employees might sustain during their work. For instance, if an employee is injured while operating machinery or develops a work-related illness, these are typically covered by workers' compensation insurance.
Examples of Professional Liability Claims
To give you a better idea, here are three examples of the kinds of situations professional liability insurance covers:
A doctor misdiagnoses a patient's persistent headaches as stress-related and advises rest and hydration. The patient later has a stroke and discovers that the headaches were a symptom of a brain aneurysm. The patient sues the doctor for negligence. Here, the doctor's professional liability insurance would cover the legal costs and potential settlement or judgment.
Financial advisor error
A financial advisor recommends that a client invest a significant portion of their retirement savings in a specific stock, claiming it to be a "sure thing." The stock crashes and the client loses a considerable amount of money. The client sues the advisor for providing misleading advice. The advisor's professional liability insurance would cover the legal defense and any potential payout.
Architectural design flaw
An architect designs a commercial building. Soon after construction, cracks appear in the walls, making the building unsafe. The business owner sues the architect for repairs and lost business costs. The architect's professional liability insurance would cover the costs of the lawsuit and any damages awarded.
Who Needs Professional Liability Insurance?
Professional liability insurance is recommended for anyone who provides a professional service, offers advice or handles client data or intellectual property — in short, anyone vulnerable to lawsuits resulting from errors, omissions or negligence in their professional services:
- Consultants: If you provide expert advice as a consultant, you could be held responsible if your recommendations lead to a client's financial loss.
- IT professionals: With the increasing reliance on technology, IT professionals may be liable for issues like software failure, data breaches or system implementation errors.
- Real estate agents: Inaccurate property appraisals, failure to disclose property defects or misleading property descriptions can lead to serious legal repercussions.
- Accountants: Mistakes in financial reporting, tax filing or financial advice can lead to significant client losses and result in legal action.
- Legal professionals: Lawyers can be held responsible for errors in contract preparation, failure to file documents on time or providing poor legal advice. They are often required to have malpractice insurance (a type of professional liability insurance) to protect against these risks.
- Medical professionals: Doctors, nurses and other health care providers can face claims related to misdiagnosis, treatment errors or medication administration mistakes. Malpractice insurance is usually mandatory for these professionals to cover such liabilities.
Professional liability insurance allows people in the above professions to conduct their business with the peace of mind that comes from knowing they are financially protected against professional risks.
How Much Professional Liability Insurance Do You Need?
The amount of professional liability insurance a business owner needs depends on several factors. These include the type of business, its size, the level of risk involved in the services provided and the legal requirements in your industry or state. Coverage limits for professional liability insurance commonly range from $250,000 to $2 million or more.
To determine the right amount of coverage for your business:
- Evaluate potential risk scenarios that could lead to a claim
- Consider the cost of legal defense and potential settlements or judgments in your field
- Ask an insurance professional for advice based on industry trends and historical claim data
- Check if your clients or industry regulations require a certain level of coverage.
Regularly review your policy as your business grows and risk factors evolve. Remember, the goal is to have sufficient coverage to financially protect your business in case of a liability claim.
How Much Is Professional Liability Insurance?
The cost of professional liability insurance can vary widely based on several factors, including the nature of the industry, the size of the business and your location.
For example, the average monthly cost for an LLC in the software development industry with 20 employees is $706. But a sole proprietor (i.e., with no employees) in the same industry would pay an average of $80 per month. These cost differences illustrate how the number of employees — as a measure of the size and complexity of the business — can significantly impact insurance costs. The nature of the software industry, which carries a high level of professional risk, also factors into these costs.
How to Get Professional Liability Insurance
Obtaining the best professional liability insurance involves several key steps. Here's a general guide for business owners:
Assess your risks
Determine the types of risks associated with your profession. Consult with industry peers or an experienced insurance agent to understand common liabilities in your field.
Identify the right coverage
Based on your risk assessment, identify the type and amount of coverage that suits your needs. Remember, coverage limits for professional liability insurance commonly range from $250,000 to $2 million or more.
Research insurance providers
Look for insurance companies that specialize in professional liability insurance and have a strong reputation in the market. Consider their financial strength, claim handling process and customer reviews.
Many insurance providers allow you to get quotes online within minutes. Share detailed information about your business operations, potential risks and desired coverage levels, and make sure to accurately represent your business to get quotes that are as accurate as possible.
Don't just look at the premium cost. Compare the coverage details, policy exclusions and deductibles. Understand the difference between claims-made and occurrence policies, as this can impact your coverage.
Consult a professional
Consult with an insurance broker or agent if you find insurance jargon confusing. They can help clarify terms and conditions and guide you in making an informed decision.
Purchase and review regularly
Once you've chosen a policy, proceed with the purchase. But don't just set it and forget it. Regularly review your coverage as your business and potential liabilities evolve.
Professional Liability FAQ
We've compiled a list of frequently asked questions that tackle important topics such as the types of claims covered, the two main types of professional liability insurance, how it differs from general liability insurance and what constitutes a professional liability claim.
About Melissa Wylie
- Insurance Information Institute. "Professional Liability Insurance." Accessed June 8, 2023.