What Is Professional Liability Insurance And Why You Need It?

TLTR: This article discusses what is professional liability insurance, how to get coverage, and some policies that include it. The article also discusses who must have the coverage.

“It’s okay to make mistakes. Mistakes are our teachers – they help us to learn.” – John Bradshaw

Knowledge is the most powerful thing you can have in your career. But with power comes responsibility, so it’s important to be careful when giving advice and making decisions for other people that depend on what we say or do.

If someone sues you or your company, then you may have a financial liability on your hands. Not only on products, but you can also even get a lawsuit on your hands for providing services. Take this school for example. According to WFAA, in September 2021, a group of parents from Allen, Texas filled a federal class-action suit against the school their children go to. The parents allege that re-opening schools are going to put children at risk in the COVID-19 pandemic.

Further details on the lawsuit are yet to emerge but it does put the school under public scrutiny and makes the lawsuit a liability. Such lawsuits can happen to anyone and anywhere. So, it’s best to prepare yourself against future lawsuits whether you think one will happen or not. How? Through professional liability insurance.

What Is Professional Liability Insurance?

Professional liability insurance is a safety net for professionals such as accountants, lawyers, physicians, and real estate agents. When you’re sued by clients on the grounds of negligence or errors during your practice it can be financially exhausting to cover all costs alone.

Luckily with this insurance, an insurer pays legal fees, defense costs, and settlement expenses.

Myth: Professional liability insurance does not cover frivolous lawsuits.

Reality: It is not uncommon that a professional is blamed based on perceived negligence. Clients can simply allege negligence and sue you. This liability insurance not only protects you from lawsuits due to real errors you make but also when you are not at fault. Additionally, it also covers legal expenses for suits that never make it to court.

Professional Liability Insurance in Different Forms

Errors And Omissions (E&O) Insurance

E&O insurance is for any service offering professionals ranging from insurance agents, doctors, lawyers, accountants, and investment advisors. Coverage for E&O insurance includes legal and settlement costs due to any lawsuit of errors, omissions, or negligence.

Malpractice Insurance

Malpractice insurance is a form of professional liability insurance that is primarily for healthcare workers and lawyers. As per the term, if a patient sues a healthcare professional because of an incorrect prescription dosage that deteriorated their health all of a sudden, that professional will use malpractice insurance because it covers medical damages, punitive damages along legal costs.

You can buy this policy from a private insurer, the employer, or the risk retention group.

Directors And Officers (D&O) Insurance

Directors and officers insurance is a form of professional liability insurance. It is the management insurance and is for the directors and officers of a company. Because of this, the policy is position-oriented rather than industry-oriented.

The policy covers the directors and officers of a company against lawsuits due to negligence, omissions, or misconduct from various parties such as investors, employees, customers, competitors. What’s more, D&O insurance protects the insured’s personal property as well.

Employment Practices Liability Insurance (EPLI)

Though not really a form of professional liability insurance, you can bundle EPLI coverage into your insurer’s professional liability policy. What does it do? It covers businesses against lawsuits by employees on the grounds of unfair and/or illegal conduct ranging from allegations of sexual harassment, discrimination, wrongful termination, etc.

Do You Need Professional Liability Insurance?

After the question ‘What is Professional Liability Insurance?’ you might ask yourself if you need it. The answer is yes. It is wise to purchase this liability insurance if you’re a professional who provides consultations and professional services to clients. This is because you never know when a client might file a lawsuit against you regardless if the error is real or perceived.

According to the Insurance Information Institute (III), during their careers, most American doctors face more than one medical malpractice lawsuit. The result of a study by Statista adds to that by pointing out how the direct losses of medical malpractice insurance amounted to $5.47 billion in the U.S. and Canada. So, even with decades of knowledge, experience, and expertise, there is a high chance that as a professional in these fields that you will eventually find yourself involved in costly lawsuits.

That is why it is wise to entertain the idea of transferring the risks of potential lawsuits by paying a few extra dollars to protect yourself from losing much, much more. The way to do that is through professional liability insurance. Also, some clients may even require you to have professional liability coverage before they retain your services.

Who Does The Policy Cover?

You can get professional liability insurance for:

• Consultants
• Counsellors
• Social Workers
• Engineers
• Architects
• Accountants
• Federal Employees
• Pharmacists
• Small Business Owners
• And More

Professional Liability Policy Types

When buying professional liability you can buy policies that cover either on a claims-made basis or an occurrence basis.

Out of these two, claims-made is the more common one. For coverage in this policy, the incidence and the filing of the lawsuit should happen when the policy is in effect. If not done so, your professional liability insurance will not pay your claims.

An occurrence policy is the best choice if you are changing careers or planning to retire. The policy provides coverage against lawsuits as long as the cause of the lawsuit was during the policy’s activation time.

Coverages of Professional Liability Insurance

This section discusses the inclusions as well as the exclusions of the policy.

Inclusions of The Coverage

Undelivered services

Professional liability protects you if you are sued because you were unable to deliver a particular level of service that you promised to a client. The insurance covers liability and legal costs in such cases.

Missed Deadlines

If you are sued because you could not complete your work by a predetermined deadline to the dissatisfaction of your client, this liability insurance can be used to indemnify such lawsuits.

Malpractice and Omissions

In the case of malpractice or omissions, your professional liability can cover up to the policy limit for any resulting lawsuit.

Negligence

Professional liability insurance can also cover lawsuits arising from negligence as when your client sues you for financial loss.

Errors

Professional liability can compensate for legal fees and settlement costs in cases where you made a simple mistake which resulted in a significant loss to your client.

Exclusions of The Coverage

Prior-knowledge Exclusions

Professional liability insurance cannot be claimed if the person or business purchased it after making an error that led to a lawsuit.

Fraud

Professional liability insurance, and insurance in general, doesn’t cover activities that violate a law, regulation, ordinance, or statute.

Securities Or Intellectual Property

This liability insurance excludes indemnification for security or intellectual property-related work due to their inherent higher risk. However, you can add it via endorsement if your job involves either of these things.

Commercial Cyber Liability

Cyber-related errors are usually outside the realm of professional liability. For such errors and risks as cyberbullying, loss of data, identity theft, etc. a specialized policy is available called commercial cyber insurance.

Cost of Professional Liability Insurance

According to Tech Bullion, professional liability insurance rates are likely to increase as insurance companies are seeking to gain a monopoly in selling the endorsement. As of 2021, according to Insureon, the average cost for this insurance is around $713 annually, for a small business. Here are some factors that determine the cost of its premium:

Type of Business

The level of risk is classified based on the type of business. The higher the risk, the higher the premium. If your profession has high exposure to professional liability lawsuits, your premium can be more costly than an average policy.

For instance, an architect working on high-value construction projects will need to pay a higher premium. While a contractor working in low-valued projects needs to pay a lower premium.

Claims History

A higher number of claims reflect a more significant risk. Businesses or professionals with multiple claims pay a higher premium than those with zero claim history.

Risk Management Practices

The risk management tools and techniques you implement can bring down the cost of your policy. To clarify, risk management efforts reflected in billing processes, reporting methods, etc. lessen the risk exposure of errors and lawsuits.

Hence, businesses and professionals that practice comprehensive risk management have lower professional liability insurance costs.

Hours Of Operation

A professional working more hours has higher risks. For instance, a part-timer has fewer chances of making errors than a full-timer. Typically, the charge for the former is lower than the latter.

Tips to Lower Your Premium

These quick tips can help you bring the cost of insurance down:

• Obtain multiple policies from the same insurer.
• Pay higher  deductible. They generally range from $1,000 to $25,000.
• Choose an insurer who is specializes in insuring your industry.
• Practice risk management techniques such as internal accounting control to reduce embezzlement or employee fraud.

Conclusion

It is not always easy to figure out if you need professional liability insurance. But, in general, any profession that requires a license should have coverage.

This insurance policy can help you have assurance for your line of work. It would be foolish not to invest in this type of coverage.

Rookies make mistakes, experts ask: what is professional liability insurance and get the coverage. Get in touch with a local insurance agent today for a free quote!

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