Professional liability insurance, also called E&O insurance or malpractice insurance, covers business owners when clients claim the business owner did not meet professional standards by making mistakes, offering bad advice, or behaving negligently. This insurance policy pays for the business’ legal defence, including settlements and court – awarded judgments.
Do Business Owners Need Professional Liability Insurance?
Many business owners mistakenly believe that this type of insurance is meant only for professionals like doctors and lawyers. However, professional liability insurance can benefit any business that provides a service, from life coaches to hair salons to computer repair stores.
If a customer or client claims that a business made some type of error or omission in fulfilling a service, this insurance will cover both the legal cost of defending against a lawsuit as well as any settlement or award. It can be an incredibly valuable type of insurance for any business that offers a service.
Have it in mind that professional liability claims can happen in almost any context where a business is providing a service. A lawyer could be sued for not filing a lawsuit on time, leading to a client being barred from taking legal action. An HVAC professional could be sued if he installs faulty wiring, leading to a fire. A customer could even file a lawsuit against a messenger service for not delivering important documents on time.
Lawsuits for errors or commissions can be filed any time that a customer or client feels unsatisfied with your services, even if you are not actually at fault. Legal fees and settlement or award costs can be quite exorbitant, particularly if what your business allegedly did or failed to do resulted in a major financial loss.
Howbeit, the coverage provided by this insurance policy will depend on the specific terms of each individual policy, but as the name implies, it only covers errors and omissions — not intentional acts. If a business or one of its employees does something intentional, illegal or fraudulent, a professional liability/E&O policy will not likely cover the resulting claim or lawsuit.
Professional Liability insurance will not cover intentional acts, illegal actions, and bodily injury or property damage. Other than exclusions for intentional wrongdoing, each policy will have its own limits and exclusions, which should be carefully reviewed before purchase.
Types of Professional Liability Insurance for Business Owners
Professional liability insurance can protect a business against many unfortunate circumstances. Some instances that are covered by professional liability insurance include the misrepresentation, negligence and inaccurate advice as well as violation of fair dealing and lack of good faith. Nonetheless, here are the two primary types of professional liability insurance for business owners.
1. Professional Liability Insurance Claims – made Policy
If a professional liability policy is written on a claims – made basis, it is triggered by any claim made within the policy period. Note that it does not really matter when the triggering event occurs; the insurer pays as long as the event is included in the policy and the policy is active when the claim is filed.
Have it in mind that some claims – made policies have a retroactive date that precludes coverage prior to it. Howbeit, the triggering event must have occurred on or after the retroactive date to be covered.
In the United States, this policy can also include tail coverage to extend the reporting period for events that happen during the life of the policy but are not reported until after the policy ends. Claims – made policies also tend to be less expensive especially since they actually provide less coverage. Once the policy terminates so does the insurer’s responsibility for paying claims.
2. Professional Liability Insurance Occurrence Policy
Professional liability insurance can also be written as an occurrence policy. It simply means that it does not matter when the claim is filed— the insurer is expected to pay if the triggering event is included in the policy and occurred while the policy is in force. As a result, occurrence policies are usually more expensive than claims – based policies. For instance, imagine a tax preparer has a one – year occurrence – based errors and omissions policy.
In that year, he makes a mistake that costs his client $30,000, but the error is only discovered after the policy has been cancelled. Since it is an occurrence policy, his insurer covers the claim even if it is reported 20 years after the event. If the tax preparer had a claims – based policy, the insurer would not pay because the claim wasn’t filed in time.
Pros and Cons of Professional Liability Insurance
A professional liability policy protects professionals and service providers from claims and losses arising from mistakes in job performance or delivery. However, this insurance policy still has some drawbacks and advantages, and they include;
- Financial losses from lawsuits can interrupt your business but if you have professional indemnity insurance, all defence cost is borne by the insurer. Defence cost such as lawyer fees, court cost, cost of filing legal papers etc is covered in errors and omissions insurance. It provides a financial protection shield to meet legal repercussions against error and omission claims.
- Performing professional services with greater confidence bring effective results. If you are blamed for financial or reputational loss happening to the client because of your advice or consultation then it put a huge mental and financial burden on your business. But professional indemnity insurance provides helping hand in such scenario and handles all your strain by providing the required monetary help.
- Professional Liability insurance enhances your goodwill and brand image. When a small business carries professional liability insurance, it sends a message of professionalism to its clients and customers. Having insurance lets them know that the business is capable of backing up the quality of their work. Further, if a small business can provide proof of insurance coverage, it can set it apart from other businesses that a customer might do business with.
- Simple day – to – day operations of a small business can put it at risk. Accidents can happen quickly and without any previous indication. Small businesses that do not have professional liability insurance can end up experiencing financial devastation when they are unprepared for these possible circumstances.
- Professional liability insurance can have positive and negative effects on your client relationships. On the negative side, it can make professionals carefree and negligence, in part because they are unafraid of being sued by their clients. After all, they have insurance.
- Professional liability insurance has no standard policy wording exists. Reading the individual policy carefully is important to ensure that it fits your particular situation. Also, not every professional liability insurance provider offers coverage for your particular business. Some providers specialize in certain kinds of businesses. You may have to invest extra time to search for a suitable provider.
- Professional liability insurance premium or cost tends to be mostly based on factors outside of your control. Factors such as the number of claims filed in your industry, your company’s current financial status, how long you’ve been in business and state laws all affect the rates of your premium.
Companies That Offer Professional Liability Insurance
Some professions are more likely to be sued for negligence, so professional liability insurance premiums vary by industry. Business size, in terms of both employees and revenue, and coverage amounts, play a part in your premium too. Also note that insurance providers can vary in pricing, industry coverage, and underwriting requirements, so you want to find one with a good understanding of your industry. Here are the top 5 companies that offer professional liability insurance.
CNA is well known for its financial strength, broad definition of professional services, and ability to offer limits up to $5 million. All these features allow CNA to write standalone policies for a wide range of professionals while offering a professional liability endorsement on its business owner’s policy (BOP) for other business owners.
This insurance provider also offers a professional liability endorsement on its BOP but the coverage is less extensive than its standalone policy but may be sufficient for businesses that aren’t traditionally considered professions like pastors, photographers, and florists.
2. The Hartford
The Hartford is a wonderful choice for legal professionals, including attorneys, notaries, paralegals, and estate planners. The Hartford offers two programs designed for attorneys contingent on the office size to properly assess and address the risk.
This insurance provider is also a well known national insurance carrier that provides excellent small business insurance policies that set the standard for commercial insurance coverage. Note that most of its policies have extended coverage included at no extra cost, while other carriers only offer them as riders.
AIG is an ideal choice for small businesses that provide technology solutions to help other businesses develop and secure digital infrastructures. Errors in this industry can immediately lead to huge regulatory issues for clients who have data breaches.
AIG understands that technology risks to businesses are greater than ever and has developed professional liability policies to address these risks for IT providers. This company is renowned as one of the largest insurance carriers in the world, and has the ability to write every policy any small business owner needs, even with highly specialized underwriting guidelines.
CoverWallet is a wonderful choice for service businesses that work directly with consumers in their homes, such as plumbers, electricians, handymen, and landscapers. Have it in mind risks that occur when you work on someone’s home and can lead to claims long after projects are complete. CoverWallet understands this and has maintained its lead as a top – rated partner to provide the specific coverage needed for service industries.
This company is well known as an online insurance broker serving small businesses in all 50 states. With proprietary technology, CoverWallet is able to extensively walk a business owner through the application process while still providing the personal touches of human customer service representatives.
Hiscox is ideal for health and beauty professionals such as aestheticians, beauticians, and massage therapists. This insurance provider also boasts of a large appetite for trainers and holistic practitioners recommending supplements and non – medical health advice.
It is a small business insurance specialist specialising more on using technology to assist small business owners in efficiently and cost – effectively obtaining the right insurance to protect their business assets. Hiscox specializes in independent contractors and sole proprietors with 10 or fewer employees.
No one is perfect and even the most professional business owners make mistakes. Professional liability insurance covers you if you make a mistake and when unhappy clients file frivolous lawsuits. Some mistakes are easily fixed while others require significant amounts of money to right the wrong. Although professional liability insurance is not without some disadvantages, your decision to carry it can keep your business safe.
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