Professional liability insurance can help cover you and your business when a professional service mistake is made with a customer or client. Professional liability insurance is a different type of business insurance than general liability insurance and it extends your protection to damages that come from your potential mistakes to your customers or clients. We’ve outlined how it works and what it covers below. You can work with a financial advisor if you’re trying to determine what insurance you may need but you can also utilize their expertise to manage your personal finances.
What Is Professional Liability Insurance?
If you provide professional services and advice as part of your career, you may need professional liability insurance. If you are a financial professional and you provide advice and counsel to your clients about managing their money, no matter how hard you try, you could eventually make an error. If that mistake costs your client money, a need for you to have professional liability insurance may arise.
Your client may file a lawsuit against you and your policy could cover the costs of your defense, legal fees and any awards you must pay. You are insuring yourself against the cost of making a potentially costly error.
In the medical field, professional liability insurance is known as malpractice insurance. In the legal field, it is known as lawyers’ professional liability insurance (LPL). In all cases, it protects the policyholder from acts of negligence even though the negligence was not intended.
Professional liability insurance is not the same thing as the general liability insurance commercial businesses usually carry. General liability insurance covers incidents of third-party injury or harm, accidents and property damage. However, general liability insurance does not offer protection against negligence, misrepresentation or mistakes made by professional service personnel.
What Does Professional Liability Insurance Cover?
Professional liability insurance, commonly called errors and omissions insurance or professional indemnity insurance, partially protects the policyholder from the responsibility of a claim of damages or negligence brought by a client or customer to whom the policyholder has sold a professional service.
Most professional liability insurance policies only cover you if they are in effect when an error or mistake is made. If you cancel your policy and a client that you previously had files a claim based on a past event, then your policy will not cover you, even if it was in force when the error was made. A few policies that do cover your past clients exist. They are called occurrence policies. They are hard to find and are not offered by most insurance companies.
Professional liability insurance covers only civil cases, not criminal cases. Even with civil cases, the policies vary by what they will cover, and each policy is different.
In general, professional liability insurance covers the following:
- Breach of contract
- Missed deadlines and services undelivered
- Errors, omissions and mistakes
Before you invest in a policy, it is important for you to understand that the wording in these policies can make all the difference in their coverage. For example, if a policy says it covers acts, errors and negligent omissions, it means that the only thing covered are omissions, because negligence acts and errors are not covered.
Examples of Covered Items
Here are some examples of each category that your professional liability insurance can cover:
- Breach of contract: The policyholder and client may have a disagreement about the terms of the contract. The policyholder, in this situation, should carefully read the contract, Fulfillment of the specific terms is not optional, and the contract should be a guide for the actions of the policyholder. If the policyholder and the client cannot come to an agreement, a lawsuit may ensue.
- Negligence: Professional negligence occurs when a professional service person, such as a doctor or certified public accountant, fails to act in a reasonable and prudent manner according to their professional training. For a client to be successful in a negligence case against a professional service person, they have to prove that negligence was the cause of the loss to the claimant.
- Missed deadlines and undelivered services: Not only will missed deadlines and services that have not been completed ruin your business’s reputation, but they could also get you sued if there is significant damage to your client. One plan is to address these issues in the initial professional services contract.
- Errors, mistakes and omissions: These are issues that also can be addressed in the professional services contract. You can put a plan into place for dealing with any errors or mistakes made and omissions in the service that might occur. However, professional liability insurance is still recommended since coming to an agreement is not guaranteed. An example would be medical malpractice.
What Is Not Covered by Professional Liability Insurance?
Some situations are not covered by your professional liability insurance but could be covered by your business’s general liability insurance. You’ll need to check with your provider and study your policy carefully to know for sure. Here are the situations typically not covered under your professional liability insurance policy:
- Customer injuries: This can include slip and fall injuries, car accidents and more. Often, the business general liability insurance covers this item except for car accidents.
- Employee Injuries: This item is usually covered by your state’s worker’s compensation program and not business insurance.
- Business Property Damage: An engineer, for example, would be likely to need this type of insurance for himself.
- Lawsuits regarding employee discrimination: Often, neither general nor professional liability insurance covers discrimination lawsuits. Before you buy your policy, check the terms.
- Vehicle business use: Generally, general business insurance nor your personal auto insurance will cover business use of your car. Specialized policies are a possibility such as a business use policy.
The Bottom Line
Professional liability insurance is coverage that all professional service people need to protect themselves and their businesses. Evaluate the policies carefully because the wording of this type of insurance policy can be confusing and tricky. Get a policy that not only suits you but the type of work you do. These policies have several exclusions that you should keep in mind when making your choice.
Tips on Insurance
- Professional and general liability insurance are complex financial products with many exclusions. It would be wise to check with a financial advisor before selecting a plan to help you maximize the dollars you’re spending and to help make sure you have the right financial protection. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check out other insurance products you need if you are self-employed. SmartAsset has gathered them for you in this one handy article.
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