What Is Professional Liability Insurance and Who Needs It?

Professional liability insurance — also known as errors and omissions (E&O) insurance — protects professionals against claims of negligence or mistakes in their work. It covers legal defense costs and settlements if a client alleges that your services caused them financial harm. Professionals like doctors, lawyers and consultants typically need professional liability coverage because their advice and services could potentially lead to significant client losses if something goes wrong.

A professional liability insurance policy covers the costs associated with defending against claims of professional negligence or mistakes. When a client files a claim, the insurance policy helps cover legal fees, court costs and any settlements or judgments. The policyholder usually needs to pay a deductible before the insurance kicks in, and coverage limits will dictate the maximum amount the insurer will pay for a claim.

Professional liability insurance comes in two main types:

• Claims-made policies provide coverage only if the claim is made while the policy is active. Once the policy expires, no claims can be made unless you purchase tail coverage. 
• Occurrence policies, on the other hand, cover any claims for incidents that happened during the policy period, even if the claim is filed after the policy has lapsed. This type typically offers more comprehensive protection but can be more expensive.

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.

Professionals who provide specialized services or advice, where mistakes or negligence could lead to significant financial loss for their clients, need professional liability insurance. This includes various fields where expertise is critical and the risk of legal claims is higher.

General liability insurance and professional liability insurance serve different purposes and cover different types of risks. General liability insurance protects against claims of bodily injury, property damage and personal injury (like libel or slander) that occur during the course of business operations. It is essential for businesses that interact with the public, own property or have employees.

Professional liability insurance coverage, on the other hand, specifically covers claims related to professional services and advice. It addresses financial losses suffered by clients due to professional errors, omissions, or negligence. This type of insurance is crucial for professionals whose work involves specialized knowledge or skills that could result in significant client losses if performed incorrectly.

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.

The amount of professional liability insurance policy 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.

Review your policy regularly 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.