Professional liability insurance, sometimes called errors and omissions insurance (E&O) or professional indemnity insurance, is important coverage for professionals like accountants, consultants, service providers and others to protect their businesses from a mistake that causes a client financial loss.
What is Professional Liability Insurance?
Professional liability insurance will cover the liability associated with negligence, personal injury, copyright infringement, or other situations that could increase costs or negatively impact the profitability of a client. Professional liability insurance will cover claims associated with:
- Inaccurate advice
Coverage can also cover previously performed services, legal defense costs associated with a lawsuit, your employees (including any temps or independent contractors that work for you).Additionally, your business can be sued if your client only perceives you’ve made a mistake, leaving your business exposed to expensive legal fees.
Professional liability insurance doesn’t cover claims that general liability insurance covers. Many professional service providers pair their professional liability coverage with general liability insurance to make sure their business has adequate insurance coverage.
How Does Professional Liability Insurance Work?
Coverage covers a specific period of time and can include a retroactive date that covers claims filed before the insurance was purchased as well as a predetermined period of time after your policy expires—this is called “the extended reporting period.”
The extended reporting period typically doesn’t last more than 60 days, but for an additional cost you can negotiate a longer period.
The liability coverage only covers claims made during the policy period or within the extended reporting period and must be from a covered error or omission that happened after your retroactive date.
With that in mind, when you’re negotiating with your insurer, make sure you are aware of the date range in which your claims will be covered before you sign on the dotted line.
Who Needs Professional Liability Insurance?
Many professional services firms need professional liability insurance. Generally, if the following list applies to you, you likely should consider this type of insurance coverage.
- Your state requires services businesses like yours to have this coverage
- If you offer professional services directly to clients
- If you regularly give professional advice to clients
- If a client requires you to sign a contract that stipulates you carry coverage
Some of the businesses that should consider this professional liability coverage include:
- Market Research Firms
- Interior Designers
- Ad Agencies
- Graphic Designers
- Technology Professionals
- Healthcare Professionals
What is the Average Cost of Professional Liability Insurance?
As with most insurance, the industry you’re in and the scope of the services you offer will impact the cost of your insurance coverage. Your business size, number of clients, years in business, and claims history will also impact the cost of your coverage. To secure the right amount of coverage and the right insurance price for your business you’ll want to get a quote from more than one insurance company. Don’t be surprised to see insurance costs somewhere between $500 and $1,000 per year.
What is the Best Professional Liability Insurance?
No two businesses are exactly alike, so the best insurance for your business could be different than your neighbor next door or the business down the street. With that in mind, here are a few things to consider that will help you determine the best professional liability insurance for your business:
- Am I working with a reputable insurance company? Don’t be afraid to ask a trusted financial advisor or another small business owner for recommendations. A stable company with a good track record working with other businesses is in your industry is a good place to start.
- Don’t equate the cheapest policy with the best policy. All things being equal, the lowest price for the same level of coverage could be the best policy for you—but don’t stop there. You’ll want to make sure you’re getting the right kind of coverage for your industry, the assumed risks to your business, and the number of employees you have, and the policy limits you will need. You’ll want to make sure your policy will cover the type, and extent, of coverage that makes sense for you. A cheap policy that doesn’t cover what you could potentially need could wind up being way more expensive in the long run than a more expensive policy that does.
- Does the coverage amount match your potential level of risk? Most policies will have limits to what they will cover in a calendar year. For example, a $1 million policy per instance with an annual cap of $3 million isn’t uncommon. If your business is in a profession with a higher possibility of lawsuit, it might make more sense to purchase a higher level of coverage. For example, if a single lawsuit could award damages of $10 million, a $1 million policy might not be enough.
- Make sure the policy is suited for your business. A doctor will require a different type of professional liability insurance than an accountant or an ad agency. Make sure you purchase the right type of liability insurance for your business. Working with a reputable agent who has a successful track record in your industry is the best way to do this.
When insurance claims are denied, it’s usually because of a policy exclusion or the claim didn’t take place within the covered period. This can make the wrong policy even more expensive. This is a decision that shouldn’t be taken lightly and you’ll want to make sure you cover all the bases before you make a decision.
Depending on the nature of your business, this could be a time to elicit the aid of a trusted financial advisor like your accountant or attorney.