What Is Professional Liability Insurance?
Professional liability insurance (PLI) goes by several names—professional indemnity insurance (PII), errors and omissions (E&O), malpractice insurance—and yet, its core purpose remains the same. This particular coverage protects your business in the case that you are sued for performing your services negligently. It also applies to situations when you haven’t made any mistakes.
Despite having rock-solid services, human error still exists as well as dissatisfied clients. Let’s face it; dealing with humans requires a hefty amount of professional grit. Effectively managing risk means acknowledging the mud your company name (and yours!) could be dragged through in a courtroom.
Keep in mind that you and your services may have performed flawlessly. However, paying lawyers to clear up a legal situation can cost a pretty penny. Professional liability insurance helps to mitigate such legal costs and other financial losses, as well.
What Does Professional Liability Insurance Cover?
PLI can start sounding an awful lot like product liability coverage provided by your general liability insurance policy. To a certain extent, they are similar in that both policies protect you from liability to third parties. However, professional liability insurance focuses solely on financial loss, such as:
- Third-party financial loss due to your product failing to perform as planned or expected.
- Third-party financial loss because of an act, error, or omission carried out during your performance of services.
Besides covering defense costs, PLI also covers disciplinary proceedings, employee errors, claims and damages, and earnings loss. Lastly, professional liability insurance works to protect you from personal injuries, such as defamation or claims of slander. Unhappy clients can be very vocal about (alleged) malpractice, which can threaten your reputation.
Why is Professional Liability Insurance Important?
While all insurance coverage works to support professional momentum, PLI plays a crucial role in the financial realm. Mainly it’s not uncommon for professional liability claims to go from molehill to mountain quickly. Defense costs can skyrocket, and your company name could be sludged in slander all over town in a matter of hours.
When it comes to opting for PLI or not, consider the following claim scenarios:
- Financial Advisors: After an investment goes sour, a client sues the financial advisor. Although the client was well aware of the risks involved with the particular venture, they still want to even the score, per se. An arbitration panel finds in favor of the advisor, but the accrued legal fees are monstrous.
- Real Estate: An unhappy real estate client sues the agent after discovering their new property was several thousand feet less than advertised. Despite the real culprit being different methods of measuring square footage, the case ends up in court. Not only do the defense costs rack up quickly, but the agent’s name is muddied up across the region.
- Accountants: After reviewing a company’s financial records, an accountant offers a couple of recommendations, which the client ignores. As a result, the business faces loss and claims the accountant. Although the accountant fulfilled their duties, the client essentially blames the accountant for lack of clarity in the situation.
- Lawyers: In family court, one of the parents is unhappy with the outcome of their child custody case. They accuse the lawyer of misrepresenting them during litigation, and the two parties face off in a different court of law.
The professional liability insurance works to keep a company afloat should a similar claim scenario arise. This policy also helps to avoid a substantial hit to the company’s finances, including bankruptcy.
Which Businesses Need Professional Liability Insurance?
All small businesses benefit from professional liability insurance. Most professional services individuals and firms —accountants, lawyers, consultants, doctors, real estate agents, etc.— don’t typically have the funds to cover expensive legal fees. As mentioned, the accrued cost of a claim can leave your company at a standstill as your competitors zoom by, leaving you in their dust.
Consider what could happen should your services fail to perform as planned. A lot of unhappy clients would likely be knocking on your door. Sometimes these unhappy clients take it as far as accusing you of malpractice, too. Remember, any business that provides a service is at risk—wedding planner, nonprofits, contractors, printers, etc.
Legal situations can get messy quickly and burn holes in your pocket. When your other policies leave you vulnerable to third-party liability, PLI can help to fill the gap.
How Much Does It Cost?
Like most coverage, professional liability insurance factors in multiple variables to land on a price. However, company revenue is often the main driver in premium cost. On renewal, premiums will usually change to reflect an increase or decrease in revenue.
The industry will determine your premium amount when coverage first begins. Underwriters consider the number of average software users, healthcare patients, or customers per year, to name a few examples. Each industry has a unique set of standards and qualifiers, so securing a customized quote is necessary.
For a more accurate estimate, an insurance company will require details concerning your company. Some additional factors the insurance company will consider are your claims history, the business location, policy limits, and type of business being covered.
Author: Carl Niedbala, Co-Founder of Cover Small Business:
Cover Small Business is the small business arm of Founder Shield, a digital insurance brokerage for high growth companies. Whether you’re an independent contractor or small business owner, we connect you directly with insurance carriers that specialize in your industry. We’ve streamlined communication to create a faster, leaner underwriting style to deliver specialized coverage at affordable rates.