Most businesses will experience a disagreement with a client or business partner over a perceived work mistake or professional error at some point, which could lead to a professional liability lawsuit. The defense costs over an alleged error can be considerable, even if you’re not at fault.
A professional liability insurance policy, also known as errors and omissions insurance (E&O), covers the cost of a lawsuit if a client accuses your professional services firm of negligence, or if your work was inaccurate, late, or never delivered. It’s referred to as medical malpractice insurance for therapists and healthcare professionals.
Even if you’ve done nothing wrong, a professional liability policy should be an important part of your risk management plan as it could help protect you from a frivolous lawsuit.
A claim happens when a policyholder seeks reimbursement from an insurance company for a covered loss, such as medical bills from an accident or the cost of repairing damaged property. This would typically be resolved between the policyholder and the insurance carrier.
A lawsuit is a legal demand for compensation that’s filed in court. Lawsuits may result in a trial, a ruling issued by a judge, or a settlement between two parties and their lawyers.
The legal "causes of action" for a professional liability lawsuit can vary from negligence (an accusation that your work was careless or didn't meet industry standards) to breach of contract (you didn't follow through on the promises you made in your contract with the plaintiff). To make their case, the plaintiff will have to establish that:
If the plaintiff is able to prove these points, the judge will likely order you to pay a judgment. Even if the judge rules in your favor and doesn’t order a judgment, you would still have to pay for your legal defense and court costs.
That’s why professional liability coverage is so important for small business owners. It protects you against claims of misrepresentation or failure to provide reasonable care to a customer.
A number of small, common errors can expose your business to professional liability risks. For example:
There are four key reasons a client might sue you over a professional liability or an errors and omissions complaint:
If your company offered specific results to a client and failed to reach them, you could face a lawsuit or claims of negligence. Management consultants, market researchers, and other consulting firms often face this challenge. A client might blame them for missed revenue goals, unexpected costs, and problems in fully executing the consultant’s strategy.
You can reduce the chance of a client failing to execute your strategy by:
It's not enough to tell your client they need to be actively engaged in the implementation of your strategies. Get it in writing. Include these expectations in your contracts and memoranda to the client.
If you’ve acted in good faith and done your best to manage a client’s expectations, yet they still threaten a lawsuit, you might offer reduced fees or a discount in the future.
A simple mistake can lead to a lawsuit if it affects your client's bottom line. If your work has the potential to negatively impact your client's finances, it's crucial to secure professional liability insurance.
For example, an architect might make a mistake in a blueprint, or an interior decorator might fail to match a paint swatch provided by a client.
To reduce the chance of a client lawsuit, check any figures to make sure they're accurate. Double-check your work to make sure it's correct and matches any requests made by the client.
HR consultants and employment agencies that recommend a poorly performing employee or contractor could face a client lawsuit for any damages related to their work, such as reduced productivity or mistakes that cause a financial loss.
You can reduce your own liability in this situation beforehand by learning exactly what the client wants in an employee or contractor, and by getting those requests in writing. You could also exercise your own due diligence with a thorough background check and reference check of every person you recommend.
If a client still complains about a recommendation, you might avoid a lawsuit by offering the client a discount or refund.
Even if a client doesn’t have a legitimate claim against your company, they could still file a lawsuit that results in costly legal fees and maybe even a settlement.
There are four ways protect yourself against frivolous lawsuits:
Keep in mind that the more professional you are with clients, the less likely they are to have a reason to complain or blame you if something goes wrong.
A professional liability lawsuit can be expensive. Even winning a case can result in substantial legal costs for the defendant. Let’s look at some professional liability claims and lawsuits to see how this coverage could benefit your business.
In 2023, the design firm Michael Graves & Associates was sued for breach of contract, professional negligence, and violations of building codes over defects found in the Humana Tower in Louisville, Kentucky. The structural defects had been hidden by drywall and other materials, and were discovered during a renovation that took place more than 30 years after the building's completion.
The lawsuit alleged welding that violated industry standards in addition to design defects. Humana plans to repair the building over the course of several years and is seeking reimbursement for significant costs to investigate and repair the damage.
Because professional liability insurance is a claims-made policy, it's important to maintain coverage even after you complete a project. As you can see in this example, lawsuits can happen decades after the incident occurred, and you're only covered if your policy is active at the time you file a claim.
You can also set a retroactive date on your policy to cover any work done before you purchased insurance.
The Comedy Store in Los Angeles filed a lawsuit in 2022 claiming it lost out on $8.5 million in coronavirus relief funds because its accountant missed a filing deadline.
The lawsuit, which is pending in court, asserts that it reached out to Moss Adams LLP for help in seeking small business relief funds that were available during the pandemic, but the firm wasn’t aware of a filing deadline and failed to notify the Comedy Store about when its application would be submitted. The lawsuit also asserts Moss Adams lost the club’s client file.
The club’s agreement with Moss Adams limits the firm’s liability to the cost of its services, or $275. The lawsuit asserts that this limit should not apply because the accountant’s conduct was “grossly negligent, fraudulent, and willful.”
Escambia County in Florida is engaged in a lawsuit with a construction company over the building of a new jail that finished 224 days late.
The county fired the designer and builder of the jail, Whitesell-Green/Caddell, over the missed deadline and withheld payment of $3.4 million on the $132 million building that was completed in 2021.
The company sued the county in 2023 to recover these funds and argued that construction delays should be allowed because they were caused by the COVID-19 pandemic.
To decrease the chance of facing a professional liability lawsuit, implement the following risk reduction measures:
Even if you try your hardest to avoid a professional liability lawsuit, a dissatisfied client or business partner may still decide to sue you. A professional liability policy covers your legal costs in this situation, including:
If your professional liability coverage includes a "right and duty to defend" clause, you won't have to worry about spending time arranging your own legal defense. This useful provision shifts the burden of managing the case from you to your insurance provider.
Professional liability insurance coverage excludes illegal acts or intentional wrongdoing, such as deceiving a client or violating a contract on purpose. It also doesn’t cover claims covered by other types of insurance.
Your cyber liability insurance covers you for data breaches, and your commercial general liability insurance covers common business risks, such as customer bodily injuries and customer property damage.
A business owner’s policy (BOP) includes both general liability coverage and commercial property insurance.
Workers’ compensation insurance covers medical costs and lost wages of your employees for work-related injuries and illnesses.
Each of these policies insures different aspects of your business risks, which is why your small business may need to carry several types of coverage for complete protection.
Complete Insureon’s easy online application today to get free professional liability insurance quotes from top-rated U.S. carriers. You can also consult with an insurance agent on all your business insurance needs. Once you find the right professional liability policy for your small business, you can begin coverage in less than 24 hours.