Professional Liability Insurance protects your business against lawsuits arising from clients dissatisfied with your professional service or advice.
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From architects to web developers, individuals and companies that provide professional advice and services can be held liable for any financial damages that their work causes. While you may strive to always provide the best services for your clients, mistakes can happen, and a client may ultimately hold you financially responsible. Even if you’ve done nothing wrong, you can still be sued if a client believes you or your firm is at fault. Professional Liability Insurance can help protect your business against lawsuits related to your professional work, covering the legal fees and judgements that may result from these claims.
Table of Contents
- What is Professional Liability Insurance?
- What does Professional Liability Insurance cover?
- What doesn’t Professional Liability Insurance cover?
- Who needs Professional Liability Insurance?
- Claims-made Policies
- Changing Insurance Carriers and Gaps in Coverage
- Shrinking Limits of Insurance
Professional Liability Insurance, also known as Professional Indemnity Insurance, protects individuals and companies from the costs of lawsuits and damages related to their professional advice and services. This insurance protects individuals and businesses that sell their expertise. It covers professionals who have gained expertise through extensive training in their field and whose work is governed by standards set by client agreements, their industry, or the government.
Professional Liability Insurance is a good complement to the basic protections provided for in general liability policies. Typically, general liability insurance covers bodily injury, property damage, personal injury, and advertising injury, but leaves out any claims outside of these coverage areas. For many professionals, including lawyers, architects, engineers, and doctors, they may face lawsuits claiming negligence, poor performance, or any failure of their professional duties that do not actually cause direct bodily injury, property damage, personal injury, or advertising injury. This is where Professional Liability Insurance can provide coverage.
- A software consulting company creates custom software for a financial services client. After delivery, the client finds critical bugs in the software, leading to financial losses. The client sues the consulting company for work errors and negligence.
Depending on the specific profession that you’re in, Professional Liability Insurance may be called by different names. For those in the medical profession, Professional Liability Insurance is commonly known as Medical Malpractice Insurance. For those in real estate, IT, or accounting, Professional Liability Insurance may be called Errors & Omissions (E&O) Insurance. Often times, Professional Liability and E&O are terms used interchangeably.
Professional Liability Insurance covers a variety of claims against the professional work or services you provide. These include lawsuits arising from:
Work Errors or Mistakes
- Example: A web hosting company provides hosting services for a number of e-commerce websites. An error in a recent update to the web host’s server software causes a server to crash, corrupting all of the data on that server. A large e-commerce client had their site hosted on this server, and their data was unable to be recovered. The client sues for damages.
Failure to Do What Was Promised
- Example: A financial advisor is hired to manage the retirement portfolio of a client. The client has requested the advisor invest only in low-risk funds and investments. Because of a few losses that the advisor has racked up, he starts to invest in riskier financial vehicles, including options and junk bonds. Ultimately, he accumulates losses of 50% over the entire portfolio. The client sues for damages.
Undelivered or Uncompleted Work
- Example: A tax preparer is hired to file annual taxes for a wealthy client. Because of some internal filing errors, he forgets to file state returns for his client, and this goes unnoticed until the client receives hefty penalties from the state. The client sues for damages.
Actual or Alleged Negligence
- Example: A property management company manages a commercial building for a building owner. The roof leaks, causing damage to the interior of the building. The building owner sues the property manager for negligence for failing to repair the roof leak.
- Example: An event promoter contracts with a printing company to print flyers for a concert. The printer delivers the flyers 5 days later than promised in the contract, which is after the concert has already happened. The event promoter sues the printing company for lost revenue, accusing them of breach of contract and misrepresentation.
Violation of Good Faith and Fair Dealing
- Example: A new franchisee of a frozen yogurt chain sought assistance from the franchisor, asking for advertising coverage, sales training, and marketing materials. He never received any of this assistance, and subsequently, his franchise suffered and was forced to close. The franchisee blames the franchisor for his losses and sues the franchisor for violating the good faith and fair dealing agreement between franchisee and franchisor.
- Example: A stationery wholesale company hires a management consultant to help the company design a reorganization plan. The plan is put into action, but after 12 months, the company’s profits are lowered due to the plan. The company sues the consultant for inaccurate advice.
Professional Liability Insurance covers you, your business, your employees, and independent contractors while they are working for your business. It will pay for any judgments against your business, as well as the costs of your legal defense, whether or not your business is found to be at fault. It’s important to note that, unlike most liability insurance, legal defense costs are counted as part of your limits of coverage.
For certain professions and businesses, Professional Liability Insurance may be required, either contractually or by law. For professions in law and medicine, this type of coverage is legally required. It’s also worth noting that coverage may vary depending on the profession being covered. While Professional Liability policies generally exclude bodily injury and property damage, bodily injury is typically included in Professional Liability for medical professionals, and both bodily injury and property damage are generally covered for architects and engineers. It’s best to consult with your insurer, as coverage is usually tailored to the profession.
Professional Liability Insurance is often tailored to a specific profession, so exclusions may differ depending on who is being covered. Generally, Professional Liability Insurance is seen as a good complement to general liability insurance, and thus it does not cover those areas that a CGL policy would cover, including:
- Bodily injury. If you or your business causes bodily injury or death of a third party as a result of your work, this would generally be covered by general liability. For medical professionals, architects, and engineers, however, Professional Liability does typically include coverage for bodily injury.
- Property damage. Third-party property damage is not covered by Professional Liability Insurance. An exception to this is Professional Liability Insurance for architects and engineers.
- Personal and advertising injury. Personal and advertising injuries include slander, libel, publications that violate privacy, copyright infringement, false arrest, wrongful eviction, and malicious prosecution. In most cases, personal and advertising injury is covered by general liability.
Additionally, Professional Liability Insurance will not cover any criminal liability or criminal defense. It also excludes any malicious, intentional, or dishonest acts.
In any professional work or service, there is always the risk of making a mistake that may impact your client negatively. If a client or customer has suffered financial loss, they may sue your business, whether or not you are truly at fault. Handling expensive litigation can deal a serious blow to your business, even if you end up winning the suit. The time and cost of defending yourself can sap the life out of your business, especially for smaller companies with fewer resources. Even if you’ve done nothing wrong, a client can still sue you. Professional Liability Insurance can provide the financial cushion you need to weather unexpected claims from dissatisfied clients.
Professional Liability Insurance is applicable to a wide variety of professions. Note that the terms “Professional Liability Insurance,” “Errors & Omissions Insurance,” and “Malpractice Insurance” are different names for the same type of insurance. By convention, some of the names are more common in certain industries.
Some professions that may benefit from Professional Liability Insurance include:
- Construction and contracting
- Financial services and investment management
- Transportation providers
Errors & Omissions is another name for Professional Liability Insurance, and this name is commonly used in these professions:
- Appraisers, real estate brokers, and home inspectors
- Beauticians, salons, or barbershops
- Family and mental health counselors
- Funeral directors
- Graphic designers
- Insurance agents
- Management and IT consultants
- Notaries public
- Occupational therapists
- Personal trainers
- Property managers
- Software developers
- Travel agents
Malpractice Insurance is the name for Professional Liability Insurance in the following fields:
- Lawyers: Legal Malpractice
- Doctors: Medical Malpractice
- Dentists: Dental Malpractice
- Nurses: Nurse Malpractice
- Opticians: Optician Malpractice
Professional Liability Insurance is written on a claims-made basis, which means that claims are only covered if the claim is made while the insurance policy is active. This is a major difference from other liability insurance policies, such as commercial general liability, which are occurrence policies. With a claims-made policy, if you do not have an active policy, you have no coverage for any of your past actions. This is important because in professional work, a client may not discover an error until much later than when the work is completed.
Occurrence policies will pay a claim if the event that caused the liability occurs during the policy period, even if the policy is no longer active.
- An occurrence policy has a policy period of Jan 1, 2019 to December 31, 2019 and is not renewed. A fire occurs on December 29, 2019, and a claim is made on January 10, 2020. The fire will be covered by the occurrence policy because it occurred during the policy period, even though the claim was filed after the policy had ended.
With a claims-made policy, a claim will only be covered if the claim occurs while the insurance policy is in force.
- A surgeon has a claims-made policy that expires on December 31, 2019 and the policy is not renewed or replaced. The surgeon performs surgery in August 2019. In February 2020, at a follow-up appointment, the patient discovers an error in the surgery and sues the surgeon. Since the claims-made coverage is no longer active, the surgeon has no insurance coverage even though the surgery occurred while the insurance policy was active. Since the claim is made when the insurance is not active, there is no coverage.
Many claims-made policies have a retroactive date. Any acts that occur before the retroactive date will not be covered, even if the claim is made while the insurance is active. For example, an insurance policy with a retroactive date of January 2020 will not cover a claim filed in February 2020 for an act that occurred in November 2019, even though the insurance is active when the claim is filed.
When changing insurance carriers for a claims-made Professional Liability policy, it is important to secure prior acts coverage, also known as nose coverage. Prior acts coverage allows your new policy to inherit the retroactive date from the previous policy. Without prior acts coverage, once you cancel your old policy, you won’t have any coverage for any previous acts.
Gaps in coverage can occur if you do not renew the Professional Liability Policy by the day it expires. If you have a gap in coverage, you will lose all coverage for prior acts. Most insurance carriers will not allow you to reinstate your retroactive coverage if it lapses without a good reason, such as a natural disaster or personal medical issues. A warranty letter representing that you have no knowledge of pending claims is also required. Renewing on time is critical to ensure you don’t lose coverage for past acts under your Professional Liability Insurance.
If you are unable to purchase prior acts coverage from your new insurance carrier, tail coverage, also known as extended reporting period, is usually available from your existing insurance carrier. Tail coverage is also sold on a standalone basis from other insurers.
Tail coverage covers events that occur while the policy is in force but that are not reported until after the policy terminates. A typical tail extends the reporting period for six months to a year after the policy terminates. However, other lengths of time are available, up to an unlimited reporting period.
- A lawyer terminates his Legal Malpractice Insurance in December 2019. He also purchases unlimited reporting period tail coverage. The tail coverage covers liability for any acts that occurred before December 2019. If a claim is filed in September 2020 for work that was performed earlier than December 2019, the claim will be covered.
For professionals who want to retire, it is important to purchase tail coverage because you may still have liability for work you have done before retiring. If you cancel your policy without tail coverage, you will not have any coverage for any of your past work and may still be sued.
Because legal and attorneys’ fees are a large proportion of Professional Liability claims, Professional Liability Insurance has “shrinking limits” of insurance. This means legal costs are included in the limit of insurance, which differs from most other types of liability insurance.
In commercial general liability insurance, legal costs do not count towards your limits of insurance.
- You have a Professional Liability Insurance limit of $1 million, and you have a judgment against you of $800,000 and $400,000 of legal fees. The maximum the policy would pay out is $1,000,000, and you would be responsible for the additional $200,000.
In contrast, if a general liability policy had a limit of $1 million and also had a judgment of $800,000 and legal fees of $400,000, that policy would pay for all of the judgment and the legal fees. This is because the judgment amount is less than the limit of liability, and general liability does not have “shrinking limits” so legal fees are fully covered and not counted towards the insurance policy limits.
Deductibles are the amount of a loss for which you are financially responsible before the insurance company’s coverage begins. A deductible is a form of risk-sharing, which provides a financial incentive for you to try to avoid claims.
Unlike most types of liability insurance, Professional Liability Insurance does usually have a deductible, with common amounts being $1,000-$25,000. The higher the deductible, the lower your insurance premiums will be.
Liability comes in many forms, and for businesses that provide professional services or advice, there is a high risk of being sued for mistakes, negligence, or failure to deliver on your work. Professional Liability Insurance is a key coverage for anyone providing professional services or advice, from doctors to general contractors to designers. This type of insurance can help protect you and your business from client lawsuits alleging failures in your work and provide funds to cover any legal defense costs, judgements, or settlements. For smaller businesses with fewer resources on hand, having Professional Liability Insurance is especially important, as the high costs of defending yourself in court could make or break your business. With a comprehensive Professional Liability policy in place, you’ll be able to navigate client lawsuits without straining the financial resources of your business.