What is professional liability insurance?

Professional liability insurance, also called errors and omissions (E&O) insurance, helps businesses manage the risks of providing professional services or advice.

PLI covers customer lawsuits and legal judgments over accusations of unsatisfactory work – missing a deadline, making a mistake, or providing a service that didn’t live up to expectations. It helps small businesses manage expenses related to the claim, preventing a potentially devastating financial blow to your firm. 

What is the purpose of professional liability insurance?

Clients can sue you if they believe you are at fault for an error that caused harm, even if the issue was simply a mistake. The cost of defending yourself against claims can be expensive. Professional liability policies offer respite from the heavy weight of legal fees and settlement costs. 

PLI helps ensure a mistake, or even an accusation of a mistake, doesn’t drain your resources or put you out of business. “A simple and cost-efficient liability policy can provide substantial coverage to save the business,” Frey says.

Michael J. Epstein, a certified civil trial attorney with the Epstein Law Firm in Rochelle Park, N.J., has been involved in professional liability lawsuits, including a recent case of legal malpractice where a lawyer took a case but failed to file it within the applicable statute of limitations.  As a result, the plaintiff lost the right to bring a case and sued the attorney. 

The insurer for the lawyer paid the settlement amount, which Epstein didn’t disclose, and the lawyer’s defense costs.

““The benefits of having personal liability insurance or professional liability insurance is, in the event of a claim, the insurer will provide defense costs and cover you for your potential exposure assuming the loss is within the policy limits,” Epstein says.

How does professional liability insurance work?

Professional liability insurance policies depend on your industry and how the policy is written. For example, a real estate agent might need protection against not fulfilling a contract as agreed, even if unintentional.

According to our analysis, professional services insurance coverage works similarly for policyholders, regardless of the policy’s focus:

  • Your insurer investigates the claim. 
  • It assigns a legal team to represent you in the case. 
  • Your policy covers the legal expenses, including any settlements or judgments, up to your policy limits.

Who needs professional liability insurance?

If you offer advice to clients, handle sensitive information, or deliver specialized services, you need professional liability insurance. This isn’t a complete list of every profession that could benefit, but it gives you an idea of who should consider coverage:

  • Consultants
  • Information technology professionals
  • Attorneys and legal advisors
  • Healthcare providers
  • Accountants 
  • Investment advisors and financial planners
  • Real estate agents and brokers
  • Graphic designers 
  • Corporate trainers and coaches
  • Freelancers and independent contractors

What does professional liability insurance cover?

Policies cover various situations to safeguard small businesses against claims. Generally, coverage includes: 

  • Negligence or work errors
  • Providing false or misleading information
  • Not honoring agreements
  • Licensing board fines or penalties
  • Attorney fees and court costs
  • Settlements and judgments

Professional liability insurance doesn’t cover everything. Typical policies don’t cover intentional acts, fraud, criminal activity, or intentional delays.  

How much is professional liability insurance?

The average cost of E&O is $61 per month, or roughly $735 per year, according to small-business insurance broker Insureon. Nearly a third of small businesses have a monthly premium under $50. However, how much you will pay varies widely based on several factors.

What are the factors that impact professional liability insurance cost?

They include:

  • The industry you’re in
  • The type of work you do
  • Business size
  • Annual revenue
  • Coverage limits and deductible amount
  • Claims history
  • Where your business is located 

How much professional liability insurance do I need?

How much coverage you need is specific to your business. The size of your business and the amount of risk involved are key factors in the decision. To give you a general idea, based on industry data, most small businesses typically opt for E&O coverage with a $1 million limit, followed by $2 million as the second most common option.

Two types of insurance you should know

There are two different types of insurance policies you should be aware of: claims-made and occurrence. 

Most professionals opt for claims-made professional liability policies. These policies tend to be less expensive but only provide coverage if the incident and the resulting claim occur while the policy is active.

With an occurrence policy, your coverage is based on when the incident occurred. If a client files a suit after the policy has lapsed, occurrence coverage protects you if the event happened while your policy was active.

Companies that offer professional liability insurance policies

If you’re a professional and liability insurance is a priority, there’s no shortage of companies to choose from. Policies can vary, and some companies offer better coverage for specific industries. Here’s a list of companies known for offering professional liability insurance:

  • Allstate
  • biBerk
  • Chubb
  • The Hartford
  • Hiscox
  • Nationwide
  • Progressive
  • State Farm
  • Travelers

What is the difference between general liability and professional liability insurance?

There are several different types of liability insurance policies. Two common small business liability policies are professional and general liability.

Professional liability protection is for mistakes that happen at work. For example, if you miss a project deadline or check the wrong box on a client’s tax form, your client can sue you.

General liability insurance is a type of insurance that covers businesses against physical risks such as bodily injury and property damage. If someone falls in your shop or if an employee damages a customer's home and your business gets sued, your general liability insurance policy will cover your business’s legal fees and court costs, as well as a settlement or judgment against you.

Professional liability insurance requirements

Some professions must have liability coverage in place to operate legally. For example, if you’re in insurance or real estate, your state may insist you have specific coverage. Some attorneys may also need it, depending on the situation and jurisdiction.

However, if your state doesn’t require insurance for liability, you may have a client that specifies it in a contract. For instance, proof of E&O is common for consultants, contractors and freelancers who work with large corporations or on government contracts.

How to buy professional liability insurance

If you’re ready to buy coverage but aren’t sure where to begin, we recommend starting with a critical look at your business risks. Here’s a guide to help you through the process:

  1. Evaluate your risk: Identify mistakes or errors that might lead to claims. 
  2. Get multiple quotes: Reach out to different insurers or use an online tool to compare policies.
  3. Pick a policy type: Decide between a claims-made or occurrence policy.
  4. Set coverage limits and deductibles: Aim for a policy that covers enough but also fits your budget.
  5. Read the fine print: Ensure you understand exclusions and policy limits to avoid surprises.

Once you decide on a policy, set a reminder to review it each year. Your insurance requirements may shift as your business grows and changes. Keeping your coverage updated helps ensure you have the protection you need.

FAQ

Do I need professional liability insurance?

You need professional liability insurance if you provide professional advice or services or handle sensitive information. It protects you against lawsuits related to mistakes, missed deadlines or misinformation that could lead to financial loss for your clients. Without it, you might be responsible for hefty legal fees and settlements that could financially ruin your business.

When is professional liability insurance required?

Professional liability insurance is often required in specific industries, such as legal, real estate or insurance. Some states mandate it by law. Some clients may demand proof of coverage, especially for projects with larger companies or government agencies. But even if it’s not legally required, having it can protect you from costly legal claims, so it’s worth considering.

How is a professional liability policy written?

Professional liability policies are tailored to the specific risks of your business and industry. The policy outlines the coverage limits, which dictate how much the insurer will pay for legal defense and settlements, policy terms, and deductibles, so it's essential to understand what’s covered before purchasing.