Without the proper professional liability insurance coverage, businesses are vulnerable to legal and financial repercussions. No matter the quality of work a company does, it still may find a customer who blames it for some damages it incurred. If you don’t have business insurance, your business could be on the hook for major financial settlements.
Errors can cost a business everything, especially if it’s not protected by professional liability insurance. Professional Liability insurance shields you from costly lawsuits that stem from mistakes, oversights, and incorrect advice.
This type of coverage is essential for fee-for-service businesses, such as accountants, architects, and financial advisors.
What Is Professional Liability Insurance?
Professional liability insurance, also known as errors and omissions insurance (E&O), protects your small business from the financial risks of professional mistakes. Any business that provides professional services or offers advice, like consultants, should consider this coverage. Your industry and the scope of your services affect the cost of this policy.
What Does Professional Liability Insurance Cover?
Professional liability insurance provides coverage to professionals who offer expert advice or services. Missed goals, poor communication, or mistakes in work can lead clients to believe that they have been cheated.
While claims may arise from a variety of different causes, there are three main categories of risk that E&O coverage will protect you from:
- Inaccurate work – If you or an employee make a mistake that costs your client money, they may have grounds to bring suit against you to recoup their losses.
- Negligent services – Standards of quality are often set by state laws, industry norms, or contractual obligations. If the work you provide doesn’t live up to these expectations, your client could sue you for negligence.
- Undelivered results – Contracts can sometimes contain clauses related to effects on the client’s business after work is completed. If a certain degree of growth, sales, profit, etc. isn’t reached, the client may have grounds to pursue any funds they expected to receive.
What Does Professional Insurance Liability Not Cover?
Aside from risks covered by other types of policies, there are also cases that a professional liability insurance policy would not cover:
- Illegal activities – If you or an employee are found to have broken any law in completing work for a client.
- Intentional malpractice – If it is proven that you or an employee intentionally cause harm to a client or project.
- Discrimination – If a client claims that you or an employee treated them unjustly based upon their belonging to a protected class.
- Punitive fines – Damages awarded in addition to actual damages meant to punish the defendant.
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Do I Need Professional Insurance Liability Cover?
If your business provides a professional service or expert advice to a client, chances are that you need E&O coverage.
Certain professionals like attorneys, real estate agents, or those in the medical field are often required by state law to carry professional liability insurance.
Situations that may require you to carry E&O insurance:
- Membership in certain professional associations
- Client contracts
- State or local laws
There are many professions, such as doctors and lawyers, that obviously have a need for professional liability insurance, but there are other industries that may surprise you. Beauty professionals, IT consultants, and marketing companies also have substantial exposure to the advice they offer to their customers and clients
How Much Does Professional Liability Insurance Cost?
On average, business owners spend $500 to $1,000 per year, per employee on professional liability insurance, according to estimates from The Hartford.
The cost of coverage is determined by several factors which include:
Risk levels vary from one profession to the next, as does the financial impact of a mistake. Insurers take all of that into account when determining rates. That’s why professional liability insurance for an engineer is typically more expensive than coverage for, say, a fitness instructor.
2. Coverage limits and deductibles
Coverage limits for professional liability coverage range from $250,000 to the millions. The higher your limits, the more expensive your premium. For deductibles, if you opt for a lower one, your premium will be higher.
When considering coverage limits, balance the annual cost of your policy with potential costs if you are sued by a client. You want enough coverage to pay any damages and defense costs.
For reference, a typical professional liability policy has a $1 million coverage limit (per occurrence and aggregate), meaning it will pay out up to $1 million for a single claim or over the life of the policy.
Expect higher premiums if you work in a city with high claim rates or legal costs.
4. Number of employees
The more employees you have, the greater the odds that one of them will make a mistake resulting in a lawsuit. Your professional liability costs will reflect the increased risk.
5. Years in business
Startups should expect higher professional liability premiums than more established companies. But as your business gains experience, your insurance costs should decrease, provided you maintain a clean claims history.
6. Claims history
A track record of prior professional liability claims is a major red flag for insurers. When it comes to business insurance, red flags equal higher premiums.
How Does Your Country Impact The Cost Of Professional Liability Insurance?
Your type of business and the industry you work in have a significant impact on the cost of professional liability insurance since different professionals are exposed to different liabilities. On average, higher-risk industries pay higher premiums, while low-risk industries enjoy lower rates.
A building design business, for example, usually pays higher premiums than an accounting business because a construction mistake could lead to bodily injury as well as financial loss. Those working in media and advertising also pay high premiums, since an advertising agency’s work directly impacts a client’s bottom line.
How Do Coverage Limits Affect The Cost Of Professional Liability Insurance?
If you want a professional liability insurance policy that pays out more per incident or per year, you’ll need to increase your amount of coverage – which means you’ll pay a higher premium to your insurance company.
The limits on professional liability policies vary significantly, from $250,000 to $2 million.
Which Professional Liability Limits Do Business Owners Choose?
Every business has its own exposure to risk, which varies from industry to industry, so while $1,000,000 as a limit may be the most popular policy limit, be sure to check the amount of coverage that suits your own business.
Other factors that small businesses take into consideration when selecting the limit of their policy coverage include:
- Legislative and/or industry association requirements – For some particular occupations, a minimum amount of coverage is required before opening and operating your business
- Contracts – If your business accepts contracts you will need to think of how much coverage is enough coverage in the event that something could go wrong and where you could be held liable.
- Number of employees – A good way to look at this is the more employees you have, the more likely the chance of a claim occurring, and in the unfortunate event a claim were to arise could you pay multiple claims at once
How To Save Money On Professional Liability Insurance Premium
1. Pay your entire premium upfront
You can choose to pay your insurance premiums once a month or once a year. While making a smaller payment each month requires less money upfront, it may cost more in the long run since insurers often offer discounts to businesses that pay an annual premium.
2. Keep continuous coverage
While it’s possible to purchase professional liability coverage when you start a project and drop coverage when you complete the project, this cost-cutting strategy can backfire. To collect insurance benefits, your “claims-made” professional liability policy must be active when an alleged mistake occurs and when the claim is filed
Continuous coverage is key if you don’t want to pay out of pocket for professional liability lawsuits.
3. Adjust your deductible, and coverage limits
Opt for a higher deductible or smaller coverage limits to lower your overall costs. Just make sure your deductible is affordable and your policy is sufficient to cover against potential claims.
4. Bundle your policies
Combine your professional liability policy with other business insurance coverage to save money across the board.
5. Keep a clean record
Maintain a high standard for quality and attention to detail to avoid professional liability claims.
How To Avoid A Claim
Professional liability insurance is there to protect your financial assets in the event of a lawsuit, but it is always better to avoid claim situations rather than let insurance take care of the aftermath of a dispute.
Ways to avoid professional liability E&O claims:
1. Processes and procedures
Having thorough plans and oversight in place will help ensure that the quality of work produced is high and the chance for mistakes is low.
2. Solid contracts and client agreements
The basis of any strong relationship is good communication. Be sure that both you and your clients are on the same page when it comes to goals, projections, and requirements. Have these specifications well documented to be sure that there is no room for misunderstandings in the future. We offer free legal documents to help keep set up some of these agreements.
3. Business structure
While it may not directly help avoid claims, having your business structured as an LLC will shield your personal finances from the effects of a judgment against your business
4. Risk transfer by use of contracts
Insurance companies provide insurance to manage risk, which you probably already know by now. But what you might not be aware of is that they will oftentimes reward policyholders for sharing risk, or working towards minimizing their risk. There are several ways to minimize your liabilities.
Firstly, if you work with outside contractors, require them to have their own insurance policy, and ask to be listed on their policy as an additional insured. That way, if something happens, you’re not exposed. Instead of relying on your coverage, you’ll be able to benefit from theirs.
Another way to minimize your risk, and ultimately your bill, is to avoid hiring uninsured subcontractors. If something happens to them while they are working for you, they can file a claim against you and your insurance. Filing claims impact the cost of your policy, so be sure to have subcontractors carry their own insurance policy. That way, they can’t rely on you.
Professional liability insurance protects against claims of inaccurate, negligent, or undelivered work. Lawsuits from claims of unsatisfactory work can result in exorbitant legal fees and put your business at great risk. Whether or not these claims can be proven, Professional liability insurance will help cover the costs associated with these disputes
Getting the right professional liability insurance policy is a simple way to protect your business against negligence claims. In short, without professional liability insurance, your business could be at serious risk of financial harm in the event of a claim.
While some industries are at a higher risk for these issues, no small business is truly safe from this problem. Therefore, it pays to be prepared in advance in the event of a lawsuit rather than scrambling to catch up.
- insureon.com – Professional Liability Insurance
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