How Does Professional Liability Insurance Protect Small Businesses?
Professional Liability Insurance is a policy that protects business owners when their specialized knowledge or skill is called into question. When a client sues them over falling short of professional standards, making costly mistakes, or failing to deliver promised services, Professional Liability Insurance can help cover the legal expenses.
That’s a fairly simple Professional Liability Insurance definition, so let's explore four facts about the coverage that might give you an even better understanding.
1. Professional Liability Insurance Addresses Lawsuits over Work Mistakes
Work mistakes happen, but when you're an expert – such as an architect, consultant, accountant, or real estate agent – your oversights can cost clients big time. That's why most professionals need Professional Liability Insurance. It protects you and your employees when your business is accused of making an error or providing substandard services.
These lawsuits might also be a reflection of your client's attitude, not your actual work. For example, let's say you're a consultant and a client brings you in to help streamline operations. You do your work flawlessly, but they had unrealistic expectations that go unmet. If they sue because they're disappointed with your services, your insurance can usually cover your legal expenses, even if the suit is ultimately thrown out.
Professional Liability Insurance definition in a nutshell: Professional Liability Insurance protects you both when your company performs insufficiently and when you're not at fault. So even if a disgruntled client brings a frivolous lawsuit against your small business, you're still covered.
2. Professional Liability Insurance Covers Common Situations
Professional Liability Insurance is almost always a must for professionals such as doctors, therapists, lawyers, and industrial designers. After all, these professions demand specialized education or training and are subject to legal regulations.
But many small businesses are required to uphold certain professional standards for their clients. Even seemingly common mishaps can open the door for financial damages:
- Miscommunication. You're a software developer and your client gets an unrealistic idea about the results they can expect from your project because they don't understand tech lingo.
- Missed deadlines. Say you're a consultant whose client is consistently slow to hand over information you need. Even though the project's delay is their fault, they might blame you all the same.
- Paperwork. You're all set to deliver an appraisal, but an employee forgets to include a key document that ultimately causes your client to run afoul of legal regulations.
Any number of small mistakes can lead to big trouble. For real-life examples, see "3 Professional Liability Lawsuit Examples."
Professional Liability Insurance definition in a nutshell: Professional Liability coverage can help address common work mistakes that cause clients financial losses.
3. Professional Liability Insurance Covers Your Legal Expenses
Lawsuits are expensive, and Professional Liability Insurance helps make sure those costs don't shutter your business. Here are some expenses this policy can address for service-related claims:
- Legal fees. Usually, these run between $150 and $400 per hour for every minute a lawyer spends on your case.
- Expert witness fees. This may include travel, meals, and document costs.
- Administrative costs. Shipping, document processing, software licenses, and copying all costs money that gets tacked on to your ever-growing legal bill.
- Court costs. This includes filing and transcript fees.
- Settlement costs. This is the lump sum you pay to avoid future legal costs, plus the cost of a mediator if used.
- Court judgments. If you lose at trial, this is the amount the court orders you to pay.
Professional Liability Insurance definition in a nutshell: Professional Liability can help pay for your lawyer, plus related lawsuit costs.
4. Professional Liability Insurance Benefits Are Time Sensitive
Professional Liability Insurance is "claims-made" coverage. That means to receive your insurance benefits, your policy must be in force when…
- The alleged incident occurred.
- The lawsuit against your business is filed.
Professional Liability Insurance definition in a nutshell: A Professional Liability policy is most effective when it's continuously active. That's why most small-business owners begin their coverage as soon as they open their doors and usually keep that same policy in force throughout the life of their business.