What Is Professional Liability Insurance (and Who Needs It)?

Professional liability insurance — also known as errors and omissions (E&O) insurance — is a safety net that financially protects your business from issues related to malpractice or negligence. Whether you're a seasoned veteran or an emerging professional, understanding professional liability insurance can mean the difference between financial security and unexpected losses.

Professional liability insurance (PLI) is a form of business insurance that provides essential financial protection for professionals who provide services. In case of negligence or malpractice claims, professional liability insurance covers the legal costs and potential settlements that can arise from these claims, safeguarding an individual's or business's finances.

PLI coverage comes in two main types: claims-made and occurrence policies.

• A claims-made policy covers incidents that occur and are reported while the policy is active. With this coverage type, you must have a live policy to reap the benefits of PLI protection.
• An occurrence policy covers any incident within the policy period, regardless of when the claim is filed. For example, an occurrence policy would still provide coverage for claims filed after the policy has ended as long as the error was made during the active policy period.

Professionals should choose from these policy types according to their specific risk profiles and needs.

Professional liability insurance covers financial losses related to the professional services or advice a business or individual provides, including the legal costs of defending against these claims. Here are some typical claims covered by PLI:

• Negligence: Claims arising from mistakes or failure to perform professional duties — such as a doctor misdiagnosing a patient or an architect designing a faulty structure.
• Misrepresentation: When a professional is accused of providing misleading or incorrect information — for example, a financial advisor giving inaccurate investment advice.
• Violation of good faith and fair dealing: If a professional is accused of not acting in their client's best interest, such as an insurance agent failing to process a client's claim.
• Defamation or libel: Includes claims for damaging a person's reputation, such as a public relations consultant spreading false information about a client.
• Breach of contract: Situations where a client accuses the professional of failing to fulfill the terms of their contract — for example, a consultant not delivering the promised services within the agreed timeframe.

Although professional liability insurance provides essential protection, it has limitations. This type of business insurance typically does not cover the following liabilities:

• Intentional misconduct: Deliberate or fraudulent acts — such as knowingly providing incorrect advice or enacting purposeful harm — are not covered.
• Bodily injury or property damage: These are typically covered by general liability insurance, not professional liability insurance. For instance, professional liability won't cover if a client slips and falls in your office.
• Workplace disputes: Claims such as employee discrimination, wrongful termination or harassment are not covered. These are generally covered by employment practices liability insurance (EPLI).
• Personal data breaches: Professional liability insurance will not typically help if sensitive customer information is lost or stolen. Cyber liability insurance is designed for this purpose.
• Employee injury and illness: Professional liability insurance does not cover claims related to injuries or illnesses that employees might sustain during their work. For instance, if an employee is injured while operating machinery or develops a work-related illness, these are typically covered by workers' compensation insurance.

To give you a better idea, here are three examples of the kinds of situations professional liability insurance covers:

Professional liability insurance is recommended for anyone who provides a professional service, offers advice or handles client data or intellectual property — in short, anyone vulnerable to lawsuits resulting from errors, omissions or negligence in their professional services:

• Consultants: If you provide expert advice as a consultant, you could be held responsible if your recommendations lead to a client's financial loss.
• IT professionals: With the increasing reliance on technology, IT professionals may be liable for issues like software failure, data breaches or system implementation errors.
• Real estate agents: Inaccurate property appraisals, failure to disclose property defects or misleading property descriptions can lead to serious legal repercussions.
• Accountants: Mistakes in financial reporting, tax filing or financial advice can lead to significant client losses and result in legal action.
• Legal professionals: Lawyers can be held responsible for errors in contract preparation, failure to file documents on time or providing poor legal advice. They are often required to have malpractice insurance (a type of professional liability insurance) to protect against these risks.
• Medical professionals: Doctors, nurses and other health care providers can face claims related to misdiagnosis, treatment errors or medication administration mistakes. Malpractice insurance is usually mandatory for these professionals to cover such liabilities.

Professional liability insurance allows people in the above professions to conduct their business with the peace of mind that comes from knowing they are financially protected against professional risks.

The amount of professional liability insurance a business owner needs depends on several factors. These include the type of business, its size, the level of risk involved in the services provided and the legal requirements in your industry or state. Coverage limits for professional liability insurance commonly range from $250,000 to $2 million or more​​.

To determine the right amount of coverage for your business:

• Evaluate potential risk scenarios that could lead to a claim
• Consider the cost of legal defense and potential settlements or judgments in your field
• Ask an insurance professional for advice based on industry trends and historical claim data
• Check if your clients or industry regulations require a certain level of coverage.

Regularly review your policy as your business grows and risk factors evolve. Remember, the goal is to have sufficient coverage to financially protect your business in case of a liability claim.

The cost of professional liability insurance can vary widely based on several factors, including the nature of the industry, the size of the business and your location.

For example, the average monthly cost for an LLC in the software development industry with 20 employees is $706. But a sole proprietor (i.e., with no employees) in the same industry would pay an average of $80 per month. These cost differences illustrate how the number of employees — as a measure of the size and complexity of the business — can significantly impact insurance costs. The nature of the software industry, which carries a high level of professional risk, also factors into these costs.

We've compiled a list of frequently asked questions that tackle important topics such as the types of claims covered, the two main types of professional liability insurance, how it differs from general liability insurance and what constitutes a professional liability claim.