While disputes with clients over negligent, unfinished, or inadequate work make up the bulk of cases, professional liability lawsuits can also encompass similar disputes with business partners.
The legal "causes of action" for a professional liability lawsuit can vary from negligence (an allegation that you performed carelessly or didn't meet industry standards) to breach of contract (you didn't follow through on your business agreement). To make their case, the plaintiff will have to establish that:
If the plaintiff proves all four of these points, the judge may order you to pay a judgment, which would be covered by your professional liability policy up to your policy limits.
Even if the plaintiff fails to prove that you made a damaging professional mistake, you'll still be responsible for the cost of hiring a lawyer and mounting a legal defense. Your policy will cover these expenses, too.
A number of small, common errors can expose your business to professional liabilities. For example:
Misunderstandings. Even if you accurately describe both your products, services, prices, and expected outcomes, a client might form unrealistic expectations for your work. When their expectations don’t materialize, they may sue your business.
Clerical errors. A clerical error in an email, contract, or the shipping address for important deliverables can cause miscommunications and delays in your work.
Failure to disclose. If you don’t provide adequate instructions to a client, the client may hold you responsible for any financial damages they suffered.
Missed deadlines. An interruption in your supply chain or business workflows could make you liable if your client doesn't get what they need on time – even if it's out of your control.
In 2010, Los Angeles County Superior Court awarded diver Daniel Carlock $1.68 million in damages in a landmark professional negligence lawsuit for the scuba diving industry. Six years before, Carlock had been diving off Long Beach when the excursion he was a part of accidentally left the area without him.
During the incident, the dive master mistakenly marked Carlock present on the boat several times before the crew realized he was missing. Carlock spent five hours floating in the choppy water off Long Beach. He claimed that he developed post-traumatic stress disorder from the experience, as well as skin cancer from prolonged exposure to the sun.
Before the lawsuit, many diving excursions depended on informal measures – like the buddy system – to keep their divers safe. Ocean Adventures and Sundive Charters, the charter company that ran Carlock’s excursion, tried to argue that Carlock took on certain risks by not adhering to these informal measures.
The judge disagreed, stating that being abandoned at sea wasn’t a risk inherent to the sport of scuba diving and that diving excursions had a professional duty to keep track of their divers. The negligence lawsuit sparked major changes in the standard practices for counting divers in the diving industry.
In 2017, Theranos settled with Walgreens for an undisclosed amount (allegedly about $30 million) after Walgreens sued the blood-testing startup for breach of contract. Before the relationship between the two companies fell apart, Theranos operated dozens of labs at Walgreens locations in Arizona.
In the lawsuit, Walgreens claimed that Theranos lied about its blood-testing technology when the two companies signed a contract in 2010. In the contract, Theranos claimed it could offer low-cost, minimal-pain blood tests using finger-prick technology. In reality, these tests were inaccurate and sometimes even dangerous.
While the details of the settlement between the two companies are confidential, Theranos also faced costly lawsuits from the Centers for Medicare and Medicaid Services, the State of Arizona, and Partner Fund Management (who invested in the startup). These won settlements and judgments on claims similar to Walgreens's.
To decrease the chance of facing a professional liability lawsuit, implement the following risk-reduction measures:
Use contracts. Make sure your contracts clearly define obligations, project timelines, and compensation, so you can manage client expectations from the start. Work with an attorney to ensure your contracts are legally sound.
Get everything in writing. Be sure to document all communication with clients. If you chat with a client on the phone, send a follow-up email. A paper trail will help clear up any disagreements about what was said in the past.
Keep clients in the loop. If clients are continually apprised of your progress and potential pitfalls, they are less likely to be surprised by the outcome. Plus, transparency builds trust, which also helps deter lawsuits.
Despite your best efforts to avoid a professional liability lawsuit, a dissatisfied client may still decide to sue you. Professional liability insurance covers your legal costs, including:
Also, if your professional liability policy includes a "right and duty to defend" clause, you won't have to worry about spending time mounting your own defense. This provision shifts the burden of managing the case from you to your insurance provider.
Complete Insureon’s easy online application today to compare professional liability insurance quotes from top-rated U.S. companies. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.