What Is Professional Liability Insurance?

What is professional liability insurance?

Professional liability insurance, also known as professional indemnity insurance, provides businesses with coverage against clients’ legal claims of negligence, malpractice and misrepresentation. This insurance can help cover the monetary costs associated with legal fees, judgments against you, settlements, compensatory damages, punitive damages, and economic or business damages that result from a lawsuit.

General liability insurance vs. professional liability insurance

It’s important to understand how general liability insurance differs from professional liability insurance. General liability insurance provides coverage against claims that arise when a third party is injured — for example, if a customer trips on the stoop in your store’s doorway and twists their ankle — or property is accidentally damaged on your premises. It also covers damages an employee causes on a third party’s premises. 

However, general liability insurance does not protect against claims that relate to professional or business practices, which would be covered by professional liability insurance. [Discover which types of insurance are best for your business.]

Errors and omissions insurance

Some professionals require errors and omissions insurance, which is another type of professional liability insurance. This insurance provides coverage for claims that a professional made a mistake in providing services or advice that caused financial or business difficulties for the client. States and licensing boards may require certain types of businesses to have errors and omissions insurance coverage. Some professionals, such as real estate agents and business accountants, also benefit from having this type of insurance coverage.

Who needs professional liability insurance?

Business owners and professionals who have expertise in a certain area — such as lawyers, accountants, consultants and graphic designers — need professional liability insurance to protect their business against clients’ claims of negligence. Professional liability insurance is required particularly if the business owner or professional meets any of these criteria:

• Signs a contract that requires insurance coverage
• Provides professional services directly to clients
• Regularly offers advice to clients

Healthcare professionals (namely, physicians) require medical malpractice insurance, a specific type of professional liability insurance. This insurance protects against claims from patients who believe they were harmed by the medical professional’s negligence or intentionally harmful treatment decisions. It also provides coverage against claims that arise from a patient’s death.

What does professional liability insurance cover?

Professional liability insurance provides coverage for the following types of claims:

• Negligence
• Misrepresentation
• Inaccurate advice

Professional liability insurance covers clients’ claims of wrongdoing made during the policy period. Policies are usually arranged on a claims-made basis, meaning insurance coverage applies only to claims that are made during the policy period. A typical professional liability policy protects the insured party against financial loss that arises from a claim made during the policy period for a covered error, omission or negligent act that takes place in the conduct of the insured party’s professional business.

Ordinary vs. professional negligence

A client can accuse any business or individual of ordinary negligence — for example, if the person slips and falls on the sidewalk in front of the business, resulting in an injury. This type of liability applies to claims that assert a business hasn’t abided by its duty and care and that a client suffered from physical or financial harm due to that carelessness. Businesses or individuals can be sued for ordinary negligence if they do not take the same amount of care as any reasonable person would to avoid harming others.

Professional negligence is when a client hires a professional for their specialized skills or experience but that professional fails to meet a higher duty or standard of care than a person without this specialized knowledge would and, consequently, causes the client physical or financial harm. Examples include an accountant failing to file a client’s tax return on time and a real estate agent failing to notify a buyer of a defect in the home.

There are two methods for measuring a professional’s duty of care:

• Foreseeability tests determine if you could have reasonably predicted your actions would hurt the client. (For example, you should have known that missing the tax deadline would lead to your client being fined.)
• Multifactor tests evaluate several factors, including the extent of the damages, the possibility of taking another action, the cost of taking that other action and the safety of the alternative options.

Misrepresentation

Misrepresentation is when professionals make false statements of material facts that affect a client’s decision when they’re agreeing to a contract. If the misrepresentation is discovered, the contract can be declared void and the client can seek damages. For example, a business consultant could be charged with misrepresenting themselves to a client by falsely stating they have expertise in a specific area.

There are three types of misrepresentation:

• Innocent misrepresentation is when the person making a false statement of material fact was unaware that the statement was untrue.
• Negligent misrepresentation is when the person who made the statement did not try to verify the statement was true before executing a contract.
• Fraudulent misrepresentation is when the person knew the statement was false when they made the statement or they recklessly made the statement to get the other person to enter a contract.

Exclusions

Professional liability insurance does not cover the following:

• Criminal prosecution
• Some forms of legal liability under civil law that are not listed in the policy
• Bodily injury or property damage, which is covered by a general liability insurance policy
• Work-related injuries or illnesses, which are covered by a workers’ compensation insurance policy
• Data breaches, which are covered by a cyber insurance policy

Claims period

Many insurance companies provide professional liability insurance on a claims-made basis. That means the policy covers claims made within a specific period and may include the following:

• A retroactive date, which covers you for incidents that happen on or after the specified date in your policy
• An extended reporting period, which covers claims that occur within a certain time after your policy expires (e.g., 30 to 60 days)

Specific wording

Some professional liability insurance policies have specific wording governing what’s covered. For instance, the policy might include a “breach of duty” clause related to whether the policyholder reported the incident to the insurer during the policy period.

Here’s another example: Coverage for a “negligent act, error or omission” protects you against loss or circumstances that occurred only as a result of a professional error, omission or negligent act. In other words, “negligent” does not apply to all three categories. A “negligent act, negligent error or negligent omission” clause is more restrictive and doesn’t cover a lawsuit in which a client claims a nonnegligent error or omission.

How much does professional liability insurance cost?

For some professionals, a professional liability insurance policy can cost as little as $22.50 per month, but several factors can affect the price.

• Coverage limits: Higher coverage limits expose the insurance company to potentially higher-cost lawsuits, so they charge higher insurance premiums.
• Type of business: Some types of businesses and individuals (e.g., lawyers, doctors) face higher standards and incur more lawsuits than other industries, so they face higher professional liability insurance premiums.
• Business size/number of employees and clients: Businesses with more employees and clients typically require more professional liability insurance coverage than single-person ventures. More coverage means higher costs.
• Location: Insurance providers price professional liability insurance in accordance with state insurance regulations and typical loss exposures in those states.
• Experience/years in business: More established business professionals may pay less for insurance than relative newcomers, as experienced professionals will have built up trust with their insurance provider and clients.
• Claim history: Businesses or products with a history of claims have a higher risk of potential lawsuits for the insurance provider, so they, too, are charged higher premiums.

When you get quotes for professional liability insurance, show the insurer what you’ve done to maintain your professionalism and how you regularly meet your obligation to provide a higher standard of duty or care. You’ll want to provide the insurance company with the following business documentation:

• Copies of contracts with current clients
• Information on documentation procedures
• Information on previous professional liability insurance coverage
• Information on processes that demonstrate quality control (where applicable)
• Information on employee training initiatives

How do you show proof of a professional liability insurance policy?

You might be required to show proof of professional liability insurance when signing a contract with a new client or to verify that you have specific coverage. To show proof of professional liability insurance, you typically need a certificate of insurance (COI). A COI is a document that contains important information about your insurance policy and acts as verification of insurance and proof of specific insurance coverage.

A COI should include the following information:

• The name of the policyholder
• The effective date of the policy
• The type of coverage involved
• The policy’s limits

Requesting a certificate of insurance

To request a COI, contact your insurance company and provide the following information:

• Contact information
• Policy number
• Certificate holder’s name
• Certificate holder’s contact information
• Information of other individuals or companies to be listed on the certificate
• Copy of the insurance requirements or contract

Kimberlee Leonard contributed to this article.