Think of Professional Liability Insurance (also called Errors & Omissions Insurance) as the policy for people who make a living off their expertise. Whereas General Liability Insurance covers mishaps that can happen to any business owner, Professional Liability Insurance addresses the unique lawsuits experts may face.
The two policies complement each other to provide a broad spectrum of coverage for small businesses. (More on their relationship here: "General Liability Insurance vs. Professional Liability Insurance.")
Who counts as an expert? Doctors, lawyers, IT consultants, architects, engineers, and others.
If your business relies on your expertise, you're expected to have extensive training in your field. Your work must meet standards set by your state, industry, or client contracts. Fail to meet these standards, and you could wind up in court.
As the video explains, Professional Liability Insurance can help pay for lawsuits when clients accuse your business of:
- Work mistakes.
- Undelivered services.
- Negligent services.
But how likely are you to be named in a lawsuit? A 2014 survey by insurance carrier Hiscox found that 13 percent of small businesses have been sued by a client, vendor, or employee. That's more than one in 10. And being sued isn't cheap: the Small Business Administration published a litigation impact study [PDF] in 2005 noting that a small business lawsuit might cost anywhere from $3,000 to $150,000.
The takeaway: even if state laws or clients don't require you to carry Professional Liability Insurance, having a policy is still a good idea. It can protect your finances by covering the high cost of a lawsuit.
Let's take a look at a few situations where this type of liability insurance can come in handy.