Whether you’re botching a customer’s dye job, making mistakes on tax returns or misdiagnosing Fido’s upset stomach, your business is at risk. Professional liability insurance (also called errors and omissions insurance) helps cover costs related to legal action brought against your company.
This type of policy typically has a claims-made structure, meaning coverage only applies to events reported during the policy period. It may also exclude coverage for wrongful acts committed before the policy was in effect. Find out more at Cost-Effective Outsourcing Insurance Solutions.
Coverage
Many small businesses that provide services or advice to clients face the risk of being sued for negligence, error or omission. These claims can be expensive and damaging to your business reputation. Professional liability insurance (sometimes called E&O or errors and omissions insurance) is designed to protect against these risks.
It provides coverage for legal expenses incurred defending against lawsuits brought by your clients. It also covers damages awarded against you by a court, including punitive damages if permitted under state law.
In addition, most professional liability policies provide “tail” coverage, which extends your protection to incidents that occurred and were reported to you before your policy expires or is cancelled. This is an important feature, particularly for professionals in industries like healthcare or legal services where malpractice claims are common. Some types of incidents or circumstances may not be covered, however, due to specific policy wordings. These exclusions typically include coverage for intentional or dishonest acts, bodily injury and property damage.
Limits
The limits that you select for your professional liability policy (also called “limits of liability”) will affect how much the insurance company pays out on a covered claim. Typically, the higher the limit, the more coverage you will have.
Most professionals need to carry professional liability insurance to work in their field, such as doctors and lawyers. Other professions that may require it include architects and engineers, as a mistake in their work could have serious consequences.
In general, a professional liability policy has an each-claim limit and an aggregate limit that lasts the lifetime of the policy. The each-claim limit usually includes a sub-limit for certain exposures, such as sexual misconduct or corporal punishment.
Your industry has a major impact on your premium, as it determines two crucial factors for insurers: how frequently you might face liability claims and how expensive they will be to resolve. Your location also influences the cost, as areas with higher claims rates generally have higher premiums.
Exclusions
A professional liability policy may include exclusions that exclude certain types of claims. These can vary widely, but common ones might include bodily injury and property damage (stuff getting broken), slander and libel and copyright infringement.
Insurance producers should pay close attention to the wording of these exclusions and ensure they are appropriate for the insured’s business activities. If not, they could lead to unanticipated coverage gaps.
For example, some professional liability policies exclude claims arising out of services provided outside the policy’s designated coverage territory. For example, a family counselor licensed in Georgia may be hired by a client in Texas. If the counselor is not properly updated with her insurer, she could end up having a claim excluded because of her work in another state.
Other common professional liability exclusions are those that remove coverage for claims resulting from the rendering or failure to render of professional services for a fee. This type of exclusion distinguishes E&O policies from commercial general liability (CGL) policies.
Reporting
Professional liability insurance, also known as errors and omissions (E&O) coverage, protects your business when clients claim mistakes in the services you provide them caused damage or loss. Many clients require proof of this insurance before they will hire a contractor.
Unlike general and property insurance, which often include other people or businesses as “additional insureds,” most professional liability policies only cover the actions of the policyholder — the professional. This is because the risk of a lawsuit over professional negligence is generally much greater than physical risks.
In order to be covered by a professional liability policy, any incident must be reported to the insurer during the policy period. This is why these policies are usually sold as claims-made rather than occurrence policies. This allows a professional to drop an occurrence policy and still retain protection for incidents that happened while the policy was in force by purchasing a tail. Also referred to as extended reporting period or delayed report coverage, this option may allow the insured to maintain protection for incidents that occurred up to the date of their last reporting under an occurrence policy.