Professional Liability Insurance: What Is It & What Does It Cover

Professional liability insurance, also known as errors and omissions (E&O) insurance, protects businesses against claims of negligence or harm resulting from professional services. This type of business insurance covers legal fees and damages if a client sues for mistakes in work or failure to perform services.

What is Professional Liability Insurance?

Professional liability insurance is a type of coverage designed to protect professionals against liability incurred due to errors and omissions in performing their professional services. This type of insurance is critical for professionals who provide advice or services to their clients, such as attorneys, accountants, financial advisors, consultants, and physicians. It’s designed to protect professionals if they’re sued for work performed in connection with their services. 

What Does E&O Insurance Cover?

E&O insurance provides broad coverage that protects professionals against potential lawsuits. Here are a few things that professional liability insurance typically covers:

• Negligence: This is a failure to provide the standard of care expected in your profession. For instance, a doctor may fail to diagnose a condition that a peer would have typically identified, leading to a lawsuit from the patient. E&O insurance would cover the legal costs and any damages awarded.
• Mistaken work product: If a professional provides a client with work product that contains accidental errors or omissions, and these inaccuracies lead the client to incur a financial loss, the professional will be covered if the client sues. 
• Misrepresentation: This involves unintentionally giving incorrect or misleading information. For example, if a financial advisor inadvertently provides inadequate or inaccurate advice that results in financial loss for a client, the client may sue the advisor for misrepresentation. E&O insurance would cover the legal defense and any potential settlement. However, in cases where a professional makes willful misrepresentations, they may not be covered.
• Violation of good faith and fair dealing: This involves an act that deprives the client of the agreed benefits. For example, if an insurance broker fails to renew a client’s policy and the client finds that they aren’t covered when they need to file a claim, the client may sue for violation of good faith and fair dealing. E&O insurance would cover the broker’s cost of legal defense and any damages awarded.

While professional liability insurance protects professionals against many risks, it typically doesn’t cover claims related to intentional wrongdoing or criminal conduct. It also excludes personal injury claims, property damage, and claims arising from services not listed in the insurance policy. Additionally, claims known before the policy period are generally excluded. 

Professional Liability Insurance Example

Let’s say you’re a freelance software engineer hired to develop a new database management system for a small business. You spend months designing and coding the system, and once you finish, you install it for the company. However, soon after the implementation, the company experiences issues with data loss and security breaches, leading to significant financial losses. The company sues you, claiming the problems are due to flaws in your software design and inadequate security measures.

If you have professional liability insurance, your insurer will likely help cover the costs of your legal defense and any damages you may be required to pay. If you don’t have E&O coverage, you’ll be left to fund your legal defense and pay any settlement or award costs out-of-pocket.

Businesses That Need E&O Insurance

Many businesses can benefit from errors and omissions insurance, depending on the nature of their work. Here are some examples:

• Consulting firms: Consulting firms often provide advice and strategies to other businesses. The consulting firm may face a lawsuit if this advice leads to financial losses. E&O insurance can help cover the legal costs and any settlements or awards.
• Legal professionals: Attorneys and law firms are at risk of making errors in the work they perform. If a client suffers as a result, they may sue for malpractice. E&O insurance protects legal professionals from financial loss resulting from such lawsuits.
• Financial advisors: Financial advisors advise on investments, insurance, tax planning, and overall financial planning. They can be held liable if their advice results in financial loss for their clients. 
• Real estate agents: When buying or selling a property for a client, a real estate agent may overlook important details, provide incorrect information, or fail to meet contractual obligations, leading to financial loss for their clients. E&O insurance protects real estate professionals against such lawsuits.
• IT professionals: IT professionals such as software engineers and IT consultants can inadvertently introduce bugs or security vulnerabilities in the systems they build or manage, leading to data loss or financial loss for their clients. E&O insurance covers the legal defense and any damages awarded in these situations.

It’s also worth noting that professionals can incur liabilities regardless of organization. Whether you’re a partner in a large law firm or a sole proprietor offering digital marketing consulting services, professional liability insurance can be a necessary way to protect your business if you make an error in your work.

How To Get Professional Liability Insurance

Getting professional liability insurance is a valuable step for many professionals and businesses. It provides a safety net, ensuring that a mistake or oversight doesn’t lead to financial ruin. Here’s a detailed guide to help you navigate the process:

1. Weigh your business risks. The first step in obtaining professional liability insurance is understanding your business’s risks. Different professions have different risk levels and types. For example, a software engineer might be at risk for creating faulty code, while a doctor could face a malpractice claim. Understanding these risks will help you determine the type and amount of coverage you need.
2. Research providers. Not all insurance providers offer the same coverage. Some specialize in specific industries, while others have more generic offerings. It’s crucial to research various providers to find the one that best fits your business needs. Consider coverage limits, deductibles, and whether they offer specialized coverages relevant to your industry.
3. Compare quotes. Once you identify a few potential insurance providers, request quotes from each. This will provide an idea of the possible cost of coverage. Remember, cheap does not always mean better. Ensure you’re adequately covered while balancing cost with the level of protection.
4. Review policies carefully. Each insurance policy has unique terms and conditions, which detail what is covered and what is excluded. Make sure to read these carefully. If there’s anything you don’t understand, ask the provider for clarification.
5. Apply for coverage. Once you’ve decided on a provider and a policy, the next step is to apply for coverage. This typically involves filling out an application form and providing information about your business, such as your services, annual revenue, and previous claims.
6. Maintain your policy. After obtaining your insurance policy, it’s essential to regularly review and update your policy to ensure it continues to meet your business needs. You should also immediately report any incidents that could result in a claim to your insurance provider.