Professional liability insurance, also referred to as errors and omissions (E&O) insurance, refers to coverage that professionals get for claims and lawsuits filed against them by clients due to mistakes they’ve made, malpractice issues, the misrepresentation of their products or services, and accusations of negligence.
This kind of insurance is primarily designed for people who provide services or advice. They may also already have general liability insurance, which will not cover the situations mentioned above.
How Does Professional Liability Insurance Work?
Professional liability insurance protects a business, as well as its employees, against lawsuits and other claims related to errors made while providing services or advice. More specifically, coverage is generally provided when the mistakes they’ve made or flaws with their services end up costing a client money.
Professional liability policies include coverage for legal defense costs and court settlements when your business faces a lawsuit because someone felt you provided poor advice, were negligent, or misrepresented something. This type of insurance is for businesses that provide professional services or advice.
For instance, if an accountant filed the wrong paperwork with the IRS and their client suffered a financial loss as a result, professional liability insurance could help offset the costs associated with the incident and any legal penalties or fees.
Claims-made policies vs. occurrence policies
There are two types of professional liability policies: claims-made and occurrence.
A claims-made policy gives you coverage for incidents that both happen and get reported within the policy’s timeframe. This can include a retroactive date to backdate coverage for a period prior to the policy’s start date. The only way to extend the reporting period for a claims-made policy is to purchase an extension, referred to as an extended reporting period (ERP) or a tail, which would cover incidents that occurred between the retroactive date and the policy’s expiration date but are reported within the ERP. Businesses undergoing a merger or acquisition may also use a runoff provision.
An occurrence policy, on the other hand, gives you protection for a lifetime, even after the policy has been discontinued, so long as the incident occurred while the policy was active. In other words, a claim could be filed ten years after the policy has been canceled, but if the incident itself occurred while the policy was in effect, then it could still be covered.
Medical malpractice insurance
When it comes to medical malpractice insurance, which is professional liability insurance for health care professionals, this specific policy can protect doctors, psychologists, dentists, pharmacists, and other medical professionals from lawsuits claiming that they were negligent or that their services led to physical harm or death.
Coverage may be provided by a hospital or other employer, or it may need to be obtained individually. It is often required by law.
What Doesn’t Professional Liability Insurance Cover?
Professional liability insurance doesn’t cover incidents such as:
- Physical accidents that occur at a professional’s place of business. For instance, if a client was visiting an engineer’s office and fell and hurt themselves on a slippery floor without any warning sign, the professional liability policy wouldn’t cover the incident. This would be filed under the company’s general liability policy.
- Fraudulent or criminal acts. If a professional makes an error, liability insurance can cover it, but if the individual was intentionally fraudulent or acted in a criminal manner, professional liability insurance would not cover the expenses they incur as a result. For example, if a doctor were to intentionally overcharge someone more than they would charge another person who received the same treatment, a professional liability insurance policy wouldn’t cover the expenses associated with the lawsuit.
- Employee-related accidents. These kinds of incidents would fall under workers’ compensation.
- Property damage. If there was damage to the structure of the business’s building or its tools and equipment, this would be covered by a commercial property insurance policy instead.
Who Needs Professional Liability Insurance?
Professional liability insurance is for businesses that provide professional services or advice. Some typical clients may include:
- Doctors
- Lawyers
- Contractors
- Architects
- Accountants
- Executives and board members
- Consultants
- Engineers
- Insurance agents
- Financial advisors
- Real estate agents
- Religious leaders
Professional liability insurance can be required by law, depending on the state in which you live and the requirements of your occupation or certifications.
For example, in Idaho, attorneys who represent private clients and are members of the Idaho State Bar must have at least $100,000 of professional liability insurance per incident with a maximum limit of $300,000 per year.
Physicians are also legally required to carry medical malpractice insurance in almost every state.
Types of Professional Liability Insurance
There are two different kinds of professional liability insurance:
- Claims-made policy: With a claims-made policy, you only get coverage for incidents that occur and get reported while the policy is active. You may select a retroactive date to extend coverage to incidents that occur between the chosen date and the policy’s effective date and an extended reporting period (ERP) to cover claims that may be filed after the policy ends but within the selected period.
- Occurrence policy: An occurrence policy covers you for any incidents that occur while the policy is active – even if they get reported after the policy has been canceled or expires.
For example, suppose an architect, Allison, purchases an occurrence policy in September 2019 then cancels the policy in June 2022. In August 2022, a former client sues Allison over a design issue that resulted in an incident that occurred in February 2021. Even though Allison has already canceled her coverage, her occurrence policy could still cover the 2021 incident since it was active when the incident occurred.
On the other hand, if Allison had a claims-made policy, her policy wouldn’t have covered the February 2021 incident when it was reported in August 2022. That’s because it was reported after the policy had ended in June. However, if Allison’s claims-made policy had a 60-day extended reporting period, then she would have coverage for the February 2021 incident when it was reported in August 2022, assuming it was reported within 60 days from her June cancellation date.
The Benefits of Professional Liability Insurance
When a business has professional liability, or errors and omissions (E&O), insurance, both the business and its employees receive financial protection, creating an umbrella of protection for business operations.
Additionally, clients working with professionals who are covered by this type of insurance are relying on their expertise, advice, and services, and one error or the failure to disclose certain information could cost both the client and the business. When this occurs, professional liability insurance can help mitigate both parties’ losses.
For example, suppose you’re an insurance agent, you advise a client to get a certain amount of coverage, and it ends up being far less than what they needed. If they chose to sue you, your professional liability insurance can cover your legal expenses, including damages in the event you’re found liable.
Without this policy, your business would be held financially accountable for covering losses it’s liable for out of pocket, and if it doesn’t have the funds to do so, then your client could face additional hardships.
How Much Does Professional Liability Insurance Cost?
There are several factors that impact the cost of professional liability insurance, such as the amount of coverage you get, the nature of the policy, your past history of claims, and where you do business. The cost of professional liability coverage may also vary significantly from one occupation to another.
How To Buy Professional Liability Insurance
To purchase professional liability insurance, you can contact your insurance broker, agent, or company for assistance. You may be able to request a quote or begin the application process online or via a provider’s mobile app. If that’s not an option, a quick call to an agent is a good way to get the information you need and begin the purchasing process.
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