How are professional liability insurance premiums calculated?

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A variety of factors can impact the cost of your professional liability insurance policy, including your level of experience and the services you offer.
A form for professional liability insurance.

Professional liability insurance (also called errors and omissions or E&O insurance) is an essential policy for businesses that offer services. Because the nature of your work can be subjective, a client could sue you simply because they didn't like the outcome of your completed project. Or they might sue you over a legitimate mistake or oversight on your part that caused them financial losses.

When these unavoidable situations or meritless claims happen, your professional liability policy can spare you the high cost of attorney's fees, court-ordered compensation, and other legal expenses. So how much can you expect to pay for this valuable coverage?

That depends on several factors.

Calculating professional liability insurance premium

When you apply for an insurance quote, your provider will need to assess how much risk it's taking on by insuring you. This evaluation will determine your professional liability premiums. Some of the factors that help your provider weigh your risks are:

1. Your industry / services you offer

The risk profiles of industries and professions vary considerably. For example, an optician generally has less potential for losses than an ophthalmologist, even though they both belong to the allied health field. As a rule, the more potential damage your services can cause, the more you can expect to pay for E&O coverage.

2. Experience in your field

If you've only been in business for a couple of years, your professional liability quote may be a little higher. Many carriers work under the assumption that the less experience you have, the more risk you present. By contrast, if your business has been established for several years and you have a history of financial stability, your E&O quote may be lower than you expected.

3. Types of clients

If your clients invest a considerable amount of money in your services and stand to lose a lot if something goes wrong, your insurance premium may reflect these high stakes. Let's say you develop software for clients that process a high volume of financial transactions. If they decide you're the reason they lost money, they could sue. And because these losses could amount to millions of dollars, you'll need more E&O protection to cover the claim. This is why your insurance application may ask how much you charged for your biggest project. 

4. Type / number of key employees

The number of key employees you cover with your errors and omissions plan can increase your rates. That's why it's important to let your agent know if you terminate or hire employees later on. You don't want to keep paying for an employee's coverage if he no longer works for you. If you employ independent contractors, you may need to include them under your policy if they don't have their own professional liability insurance.

Protect your small business with professional liability insurance

5. Business location

Your carrier may adjust your insurance rates based on the litigation costs and market conditions associated with your business's location.

6. Policy limits

Some states require that some professions (such as healthcare professionals) carry a minimum amount of professional liability insurance (often called malpractice insurance in that field). Regardless of your field, keep in mind that the amount of per claim / aggregate limits you choose will directly affect your premium costs.

7. Deductibles

Many providers allow you to increase your deductible (the amount you pay out of pocket before your insurance benefits kick in) as a way of lowering your policy's annual premium. Remember that the deductible payment is required in full before the claim will be defended. That's why you shouldn't take on a deductible amount that could potentially jeopardize your finances. After all, E&O coverage is supposed to keep your business financially stable.

8. Inclusions, exclusions, and policy features

You can customize your professional liability policy with other types of coverage, such as:

Additional protection means a higher premium quote. To keep your rates low, be sure to read the policy to make sure it doesn't exclude essential protection (such as coverage for lawyer's fees) or include extra coverages you don't need. Remember, not all policies are created equal, and one provider may include coverages in its standard plans that others don't.

9. Claims history

Though many carriers evaluate claim histories on a case-by-case basis, most will still increase premiums for businesses with a track record of losses. However, a spot-free record can help keep prices low.

10. Payment plan

Though you can save money by paying for your professional liability coverage in annual installments, many small business owners opt for monthly payments because it is more budget-friendly.

How much does professional liability insurance cost?

Finding a professional liability insurance policy that fits your budget might be easier than you think. Visit the page professional liability insurance costs analysis to get an idea about what our clients typically pay for this coverage.

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