woman going over paperwork with a man
Liability insurance, also known as errors and omissions (E&O) insurance, covers your business in the event of a lawsuit resulting from errors in services rendered. — Getty Images/mediaphotos

Imagine you’re a photographer who takes pictures at a wedding, but your camera storing all those precious shots is stolen. Or, perhaps you file a tax return for one of your accounting clients who later gets audited by the IRS, which notes that you made significant errors in preparation.

Fortunately, you have professional liability insurance coverage in place. Without it, any one of these scenarios could lead to a costly claim that would likely bankrupt your operations.

If you run a business that offers any kind of professional service — including an agency, consulting firm, health care, legal or financial practice, construction company, or board of directors — this insurance coverage is critical. After all, everybody makes mistakes; but when you make blunders in these lines of work, you’re an easy target for litigation. [See our full business insurance guide.]

What is professional liability insurance?

Maureen Le Piane, senior vice president of Small Business and Portfolio Underwriting for Hiscox USA, said any business that renders a professional service to clients should have professional liability insurance, which is also called errors and omissions (E&O) or malpractice insurance.

“From graphic designers to mental health counselors to real estate agents, this coverage is important. These professionals earn most of their revenue by providing a service to a client as opposed to a good or product,” she said. “Professional liability coverage absorbs the costs to defend legal claims made against you for errors in services rendered.”

Christie Lucas, vice president and commercial multi-peril product manager for Erie Insurance, said the risks of not being properly insured are enormous.

“A large liability loss could cost your company thousands or even millions. Even if the suit is found to be groundless, it can possibly impact your business’ reputation,” said Lucas. “If your professional advice or services causes another person harm, such as making an error or failing to perform the service, you could be in big trouble without this protection.”

A large liability loss could cost your company thousands or even millions.

Christie Lucas, VP and commercial multi-peril product manager, Erie Insurance

How much does professional liability insurance cost?

Business owners often assume that professional liability coverage is not affordable. While malpractice insurance for doctors, lawyers, architects, engineers and other high-earning professionals who work in riskier professions can be relatively expensive, most small business owners can expect to pay less than $1,000 a year, said Joel Ohman, certified financial planner and founder of CarInsuranceComparison.com.

Most professional liability policies provide $1 million in coverage, including legal defense costs.

“Professional liability coverage can be purchased as an endorsement to your business owner’s policy or as a separate policy unto itself,” Myles Trempe, producer with Wallace & Turner Insurance, said.

If your business exceeds $1 million in sales, you should increase your coverage amount past $1 million to properly protect you, recommended Julie Jakubek, owner of an Allstate agency.

“Defense costs mount quickly. You should select a coverage limit that will comfortably pay defense costs while leaving a sufficient limit for settlement in the event one is awarded,” said Le Piane. “Low-cost premiums are important to a small business; but be sure it doesn’t come at the cost of sacrificing important coverage components.”

Professional liability insurance limitations

Be forewarned, however: Professional liability insurance doesn’t shield you from every possible scenario.

“These policies typically do not cover intentional acts, fraud, dishonest or criminal acts, or intentional delays,” noted Lucas.

Other misconceptions persist with this insurance, too.

“Professional liability insurance does not cover slips and falls, business contents, or if an employee gets hurt on the job. Those are covered by a commercial general liability policy, a business owner’s policy, and a workers’ compensation policy, respectively,” said Jakubek.

Lastly, keep in mind that your policy is written on a “claims made” basis and is subject to a retroactive date.

“If a claim is made against you for an incident that happened before the retroactive date stated in your policy, the claim will not be covered,” warned Lucas. “Therefore, you want a retroactive date that goes as far back as possible.”

The claim must also be reported to your insurance company within your policy period, as well, so be careful not to let your policy expire.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published April 25, 2019