Trapeze artists don’t perform without a safety net. And if you’re running a company, you shouldn’t either. The business equivalent of a safeguard that could save your bacon is professional liability insurance. Also called errors and omissions (E&O), this type of policy does the same thing for lawyers, accountants, software developers, and even real estate agents as malpractice insurance does for doctors. It provides financial protection if a client or customer files a civil lawsuit against you related to a service that you either failed to provide entirely or sufficiently.
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Of course, no one gets into business to purposely mess up, but mistakes happen—and there are always things beyond your control, including disgruntled customers who also happen to be litigious. Professional liability insurance covers the costs of litigation, settlement, and damages (although every policy is tailored to a company’s unique needs and requirements).
While medical malpractice cases tend to capture the people’s attention due to their lurid nature—and typically high cost of damages–professions outside the medical field, specifically in the tech industry, are increasingly being held accountable for missteps committed in the course of their work.
If you think about some of the high-profile malpractice and negligence cases to make headlines recently, the types of industries being named in such suits are as likely to be tech-related, including IT consultants, software designers, and website creators. Why? Because the expertise these professionals provide is so essential to nearly every company’s viability—and they have such specialized knowledge—that they are more and more being held to higher standards of conduct. The impact technical mistakes or oversights, such as data breaches, privacy leaks, hacks, and cyber crimes can have on a company’s finances and reputation put even more pressure on technologists to get it right at all costs—or make sure they have adequate protection if something goes wrong.
What Is Professional Liability Insurance?
Professional liability insurance keeps you and your company protected from lawsuits for negligence, common mistakes, omissions, misrepresentation claims, and more. After a business owner’s policy (BOP), professional liability insurance is often one of the first types of coverage companies get, partly because these claims can be very costly. While malpractice insurance is mandated for medical professionals and lawyers by many states, professional liability usually isn’t. However, for anyone selling products, providing a professional service, or dispensing expertise in a specific area E&O is critical. And your clients may actually stipulate in their contracts that you carry E&O.
Even if you have general liability insurance, professional liability covers claims specifically related to your particular expertise, which are not covered by a general policy. If a client slips and falls in your office and sues you, for example, your general policy will help you take care of related expenses. But if you miss a line of code in a software product because you stayed up all night—and your client loses money because their website malfunctions due to your error—professional liability will cover the legal expenses and settlements when your client wants you to pay for your mistake.
What’s the Difference Between E&O and Professional Liability Insurance?
E&O and professional liability insurance are the same thing. The different names (it can also be called professional indemnity) are a result of the way different insurance brokers tailor insurance packages for different industries. In fact, different industries have specialized policies customized for their unique needs. For pilots, there’s a “pilot warranty,” for public relations professionals there’s “media liability.” For those in the tech industry, a fairly new type of policy gaining popularity is called Tech Errors & Omissions (Tech E&O), and it provides a special type of protection not covered by either standard E&O or Professional Liability Insurance.
Tech E&O is designed to protect technology companies if a professional mistake made by you or an employee impacts your clients or customers. Tech E&O is specifically designed to cover your fees if a client claims that your mistakes caused a financial loss.
What’s Covered Under Professional Liability Insurance?
Professional liability insurance can help you pay for a lawyer and other associated legal fees if a customer or client files a civil suit alleging that they lost money due to an error you made. But there are limits to what a professional liability policy covers.
Here’s what a professional liability insurance policy usually covers:
- Bad advice. Lawsuits alleging your recommendations made a customer lose money.
- Misrepresentation. Failure to deliver a product or service as expected or on deadline.
- Bad faith. Withholding critical information, lying, or other actions that violate your contract.
- Copyright infringement. Unintentional violations of another party’s right to protect their intellectual property.
- Malpractice. Failure to deliver proper services.
Here’s what professional liability insurance doesn’t cover:
- Intentionally illegal, dishonest, or malicious acts. If your mistake or oversight was intentional, it could actually be criminal and therefore professional liability wouldn’t cover it.
- Bodily injury and property damage. These are covered under general liability insurance.
- Claims filed when the policy was not active. Professional liability is a claims-made policy, which means that the coverage is triggered when the claim is filed. The policy must be active both when the alleged issue occurred and when the claim was filed.
How Much is Professional Liability Insurance?
Several factors affect how much you’ll end up paying for your business’s professional liability policy. On average, a small business can expect to pay between $500-$1,500 per year for E&O coverage. Larger companies have a lot more risk exposure and will have to pay more for coverage, usually between $500 to $1,000 per employee per year. Until you consult with a licensed insurance broker you won’t know your exact premium. Underwriters typically look at the following when assessing costs of coverage:
- Industry. The particular field you’re in impacts your premiums. Doctors pay more than estheticians, for example, due to the nature of the services they provide. Underwriters use models from similar industries as a way of gauging how likely you are to face claims and how expensive they are to resolve.
- Location. Businesses in highly populated urban centers, such as New York and San Francisco usually have higher premiums. Also, some states require certain professions to carry specific kinds of policies. Oregon and Idaho, for example, require lawyers to have legal professional liability insurance.
- Coverage limits. Like all insurance policies, E&O limits the amount of coverage available for third-party claims such as lawsuits. E&O has two types of limits: an occurrence limit and an aggregate limit. An occurrence limit is the maximum amount an insurer will pay for a single claim. An aggregate limit is the maximum amount an insurer will pay for all claims made during the policy period. If your industry is fairly low risk, you might want to go with a lower aggregate limit. If your industry has more risk exposure, you may want to have higher limits, although that means higher premiums, too. The typical individual limit is $1 million.
- Size. The more people your company employs, the risk that one of them will make a mistake increases. So bigger companies will have higher premiums.
- Years in business. Insurers look more favorably upon established, mature companies and may give them a break on premiums. Brand-new professionals without a track record (for example cannabis entrepreneurs), can expect to pay more.
- Claims history. As insurers prepare your quote, they’ll ask you how many E&O-related lawsuits have been filed against your business. More claims equal higher premiums.
- Policy deductible. This is the amount of money you’ll need to pay before your policy pays up. E&O policies have two types of deductibles: First-Dollar Defense Deductibles (FD) and Defense-And-Loss Deductibles (DL). With FD deductibles, your company doesn’t have to pay anything until the claim is settled (or a judgment is reached). With DL deductibles, your policy deductible is applied to the cost of your defense, but you’ll need to pay a part of the legal fees even if the lawsuit is groundless or thrown out. Whichever deductible you decide to go with will impact your E&O premium cost.
Is E&O Insurance Necessary?
E&O insurance is only legally required for some professions in some states. But remember, your business is unique because of what you bring to the table as a professional. If you pitch and sell your services as differentiated from the competition, exclusively available only through you, or better, faster, and cheaper than others, then that’s what your client expects. If you think about it that way, what you’re offering is truly special–and worth protecting.
Overview: Professional Liability Insurance Cost
When it comes to professional liability insurance costs, most notably that this type of insurance is important for any business owner. The cost can vary depending on the size and type of the business. The size of the business will always impact the cost of the insurance. The larger the business, the more likely it is that something will go wrong and a claim will be made against the company. The type of business will also impact the cost of the insurance. For example, businesses that deal with high-risk products or services will generally have to pay more for their coverage. This is because there is a greater chance that something will go wrong and a claim will be made. Finally, the location of the business can also impact the cost of professional liability insurance. If the business is located in an area that is prone to natural disasters, then the company will likely have to pay more for their coverage.
By keeping these things in mind, business owners can get a better idea of what to expect when it comes to professional liability insurance costs. By understanding the factors that impact the cost of the insurance, business owners can make sure that they are getting the coverage they need at a price they can afford.