Professional Liability Insurance

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What Is Professional Liability Insurance?

 

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.

13% of small businesses have been sued by a client, vendor, or employee.

3 Ways Professional Liability Insurance Protects Your Business
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Work Mistakes

If clients sue you over an error that costs them money, Professional Liability Insurance can help pay for their losses.

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Undelivered Services

If you promise your client a result your finished work doesn't deliver, Professional Liability Insurance can help cover the breach-of-contract lawsuit expenses.  

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Negligent Services

If your work doesn't meet industry standards, Professional Liability Insurance can help pay the legal bills when your client sues.

Professional Liability Insurance Can Help Pay ...

Attorney Fees

Court Costs

Settlements and Judgements

Coverage for Work Mistakes

Try as you might, you can't guarantee you'll never make a mistake in your work. To err is human, after all. But what happens when that slipup costs your client cold, hard cash?

Take the video's example: an app you design keeps crashing, and your clients are losing customers and sales every minute it's down. They think you should reimburse them for that lost revenue, so they sue you.

You can turn to your Professional Liability Insurance policy to help cover the lawyers' fees, court costs, and settlements or judgments.

Now let's throw a wrench in the gears. Say your app performs perfectly, but your clients insist that it's buggy. They'll probably have a hard time making their case, but a frivolous lawsuit can still cost you $2,000 to $5,000 in attorney fees, according to the US Chamber Institute for Legal Reform's report Tort Liability Costs for Small Business [PDF].

Even if a case never makes it to court, your Professional Liability policy can help pay for attorneys' fees so they don't cut into your bottom line.

 Meritless lawsuits cost between $2,000 and $5,000 in attorney fees.

Coverage for Undelivered Services

Sometimes a project doesn't pan out the way you said it would in your contract. When that happens, watch out: the median dispute over a contract costs $91,000, according to the Court Statistics Project.

Think it won't happen to you? According to the International Association for Contract & Commercial Management, nine percent of contracts result in a claim or dispute.

Look at the video's example. A consultant projects a high ROI in her proposal, but the results are lackluster. Her clients can sue to make up those losses and cite their contract for support.

Another example: say your client contract stipulates that you'll finish a project by a certain date. If you miss the deadline, your clients can claim you breached the contract and forced them to go over budget.

In both cases, Professional Liability Insurance can help you make amends with the client by paying for their losses.

Contract lawsuits typically cost about $91,000.

Coverage for Negligent Services

Your expertise is a double-edged sword: it helps you win clients, but it also sets high expectations. In some cases, those expectations are perfectly reasonable.

Take the video's example of an architect. It takes a lot of skill and education to design buildings that both meet client demands and comply with building codes. But let's say an architect makes an oversight that compromises a building's safety. The building owner can sue for negligence (the legal standard of being unreasonably careless).

Unfortunately, negligence suits can be pricey. A court may award the client damages, but it can also monetarily punish you to deter future recklessness. As we mentioned above, lawsuits can cost between $3,000 and $150,000 dollars. But if you're staring at a pile of rubble after a building collapses, you could end up paying much more.

Lawsuits cost $3,000 to $150,000 for SMBs.

Who Needs Professional Liability Insurance?

 
  IT Professionals Accountants Architects Real Estate Agents Consultants Healthcare Professionals
Who Requires You to Have E&O? IT project managers and clients Clients Clients, business partners, and licensing boards Clients, buyers, and sellers Clients Clients and many state licensing boards
How Does E&O Help? Financial protection for lawsuits over software liability, data breaches, and tech errors Financial protection for accounting errors, data entry errors, miscalculations, and lost documentation Financial protection for over-budget projects, delays, and problems with materials Financial protection for disclosure errors, failure to close, and mismanagement Financial protection for lawsuits over inaccurate projections and ineffective advice Financial protection for malpractice lawsuits
IT Professionals
Who Requires You to Have E&0?
IT project managers and clients
How Does E&O Help?
Financial protection for lawsuits over software liability, data breaches, and tech errors
Accountants
Who Requires You to Have E&0?
Clients
How Does E&O Help?
Financial protection for account errors, data entry errors, miscalculations, and lost documentation
Architects
Who Requires You to Have E&0?
Clients, business partners, and licensing boards
How Does E&O Help?
Financial protection for over-budget projects, delays, and problems with materials
Real Estate Agents
Who Requires You to Have E&0?
Clients, buyers, and sellers
How Does E&O Help?
Financial protection for disclosure errors, failure to close, and mismanagement
Consultants
Who Requires You to Have E&0?
Clients
How Does E&O Help?
Financial protection for lawsuits over inaccurate projections and ineffective advice
Healthcare Professionals
Who Requires You to Have E&0?
Clients and many state licensing boards
How Does E&O Help?
Financial protection for malpractice lawsuits

Free eBook Download

Find out how to protect your business from professional liability claims and the expensive lawsuits that result in our free eBook, The Small-Business Owner's Guide to Professional Liability Insurance Claims.

Download Now

How Much Does Professional Liability Insurance Cost?

Professional Liability Insurance can be pretty affordable, especially if you run a low-risk business (like a one-person consultancy). You may pay around $700 a year – or $60 a month – for your policy.

But let's zoom out for a second. On average, Professional Liability policies cost $985 per year. The median cost, however, is $758, meaning half of businesses pay $63 per month or less. In fact, nearly 70 percent of our customers pay less than $1,000 per year for their policies.

Learn more about the cost of Professional Liability Insurance in our business insurance cost analysis.

A word to the wise: It might be tempting to buy your coverage to win a contract and drop your insurance once the project is done to save money. But to collect your insurance benefits, your Professional Liability policy must be active both…

  • When an alleged mistake occurs.
  • When the claim is filed.

In short, continuous coverage is key if you don't want to pay out of pocket for lawsuits. Learn more about that in "What Is Claims-Made Insurance Coverage?"

$758

Median yearly cost

$985

Average yearly cost

$600

Average yearly cost for low-risk businesses

 50% of small businesses pay less than $63 a month for Professional Liability.

Professional Liability Insurance: Further Reading

Professional Liability Insurance on the Insureon Blog