Professional liability insurance (also known as “errors and omissions” or “practical liability” insurance) is an important risk management tool for many professionals. If you’re a health care professional, lawyer, accountant, engineer, consultant, real estate agent, or any other sort of professional who works for a client on a regular basis, you may want to strongly consider purchasing this type of coverage.
When deciding if professional liability makes sense for your business, there are several factors to consider. In this blog post, we will explore the pros and cons of getting professional liability insurance so that you can make an informed decision about whether or not it’s right for you.
What Is Professional Liability Insurance?
Professional liability insurance is a type of coverage that protects you against claims and lawsuits related to your job. The claims may arise from a mistake you made, something you didn’t do correctly, or something you improperly performed.
In other words, professional liability can cover instances when you did something you shouldn’t have done (an error) or when you didn’t do something you should have done (an omission).
Professional liability insurance will help you cover the associated costs, such as legal fees and any settlement or judgments that may come out of these types of claims.
Professional liability policies typically fall into three categories: errors and omissions, malpractice, and executive liability, Errors and Omissions (E&O) Insurance.
Real-Life Professional Liability Claim
For example, let’s consider this scenario involving a claim made against a law firm:
In this example, the insured law firm provided legal services in a matter involving a commercial loan. The loan was intended to be non-recourse, which means the client could not be held personally liable if they defaulted. However, the loan defaulted, and the note was sold to another lender.
The new lender sued the client. An issue over the translation of the loan contract, which the law firm drafted, came up in court, and the court determined that the contract was unambiguous and that the law firm had made an error.
A claim was later filed against the law firm for the settlement amount and $465K in related attorneys’ fees. Overall the matter was resolved for an expense of approximately $800,000.
The scenario above demonstrates that even careful legal professionals can make errors leading to a client lawsuit. However, in this case, professional liability insurance coverage prevented the law firm from incurring out-of-pocket costs that could have put the firm out of business.
Who Needs Professional Liability Coverage?
The following professions are candidates for professional liability as detailed by trusted choice:
Anyone who charges clients for advice, or a service, needs professional liability insurance. Here’s why:
- Because your clients may expect you to have a professional liability policy (and a certificate to prove it) before they work with you.
- Because clients can sue you, whether you made a mistake or not.
- Because even if a case has no grounds, you still have to defend yourself. Not just because a negligence claim can damage your reputation. But because you’ll end up with a default judgment if you don’t. And that means you’ll have to pay whatever your client says you owe.
- Because unless you’re a legal expert, you’ll need an attorney, and lawsuits are expensive. Expensive. Legal fees, court costs, and compensation can run to 5, sometimes even six figures. And without professional liability insurance, you’ll have to foot the bill yourself.
- Because defending a claim doesn’t just create stress and cost you money; it takes time.
Is Professional Liability the Same as E&O Insurance?
Errors and omissions (E&O) and professional liability insurance offer identical coverage. However, while the two policies are the same, different industries use different terms to refer to the same range.
In other words, depending on your line of business, you may hear the term errors and omissions insurance for professional liability. However, there is no difference in these coverages.
General Liability vs. Professional Liability – What’s The Difference?
Comparing general and professional liability insurance may help you decide what policy or policies to consider for your organization. Each protects different exposures.
General liability protects your business against various claims, including bodily injury, personal injury, property damage, and reputation harm.
For example, imagine a customer slipping and falling inside your business due to a wet floor. The customer could sue for the medical bills related to their injuries. General liability insurance could help cover costs in this instance.
On the other hand, professional liability insurance protects those who provide advice or services.
Consider, for instance, if a client loses thousands of dollars due to a service provider’s clerical error. The client may sue in this case, and professional liability insurance could help cover legal costs.
How to Find the Right Professional Liability Policy for You
Before you purchase a professional liability policy, you should first make sure that you understand your state’s licensing rules. This way, you’ll know what your state’s requirements are and which policies you can actually qualify for.
An independent insurance agent can best help you navigate your options and find a policy that works for you. Before you sign on the dotted line, make sure you read your policy in full and understand exactly what coverage you’re receiving.
Ask questions if you’re unclear about anything, and make sure you understand exactly what you are and are not covered for.
You may find this illustration helpful in understanding how coverage needs are determined:
The bottom line is that professional liability insurance is not a luxury. It’s a necessity for many professionals, especially those in fields that are more prone to litigation.
If you’re in a field that could see you being sued for damages related to your job, you’re strongly advised to consider professional liability insurance.
While it does come with a cost, this type of coverage can be incredibly helpful in the event that someone decides to sue you.
Claim Scenario provided by CNA
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