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Mishaps happen. But mistakes made during the course of running your business could be costly and result in a lawsuit. For example, if you fail to deliver by a deadline or a client says your professional advice resulted in financial harm, you may face legal challenges.
A claim against your company—even without merit—can result in expensive legal fees and be financially devastating.
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What Is Professional Liability Insurance?
Professional liability insurance is a form of business liability insurance that covers your small business against claims of mistakes in professional services, even if the claim has no merit. Also known as “errors and omissions insurance,” professional liability insurance can be a key component of the best small business insurance policies.
Professional liability insurance may have different names, depending on your profession. For example:
- Medical malpractice insurance is a form of professional liability insurance for healthcare professionals, such as counselors, doctors, nurses and therapists.
- Media liability insurance is a form of professional liability insurance for media and advertising professionals.
How Does Professional Liability Insurance Work?
If someone claims your business made a mistake, your professional liability insurance will cover your legal fees, settlements and judgments up to your policy’s limit. For example, if you’re sued because of a mistake that causes your client to lose money, you’ll be covered for your legal costs and settlement.
There are generally two main types of professional liability insurance:
- Claims-made policies: These cover claims that are made during the policy period, meaning your policy must be in effect when the loss occurred and when the lawsuit is filed for the claim to be paid. Most professional liability policies are claims-made policies.
- Occurrence-based policies: These cover claims that happen during your policy period—even if the claim is reported after your policy expires. This can be useful for claims where the damage or injury wasn’t evident until after the policy ended.
What Does Professional Liability Insurance Cover?
As good as your company may be, mistakes are bound to happen. That’s why it’s worth considering adding professional liability insurance to a small business insurance policy.
Professional liability insurance is also known as errors and omissions insurance. It covers the costs associated with claims of professional mistakes, including legal fees, court judgments and settlements, and other types of fees, such as licensing board penalties.
Here are some examples of mistakes that could prompt a client to sue your company.
- Incorrect or inaccurate advice: A financial consultant provides advice that results in lost revenue.
- Misrepresentation: A contractor fails to complete a renovation on time, resulting in a client being unable to open their business and losing revenue.
- Negligence: A lawyer fails to file a complaint on behalf of their client within the statute of limitations, resulting in the client losing money in both legal expenses and a potential award had the case gone to trial.
- Violation of good faith and fair dealing: A realtor fails to disclose key information to the buyer.
- Copyright infringement: A website designer unintentionally uses a copyrighted image without permission.
What Does Professional Liability Insurance Not Cover?
Here are some common exclusions found in a professional liability insurance policy:
- Bodily injury or property damage. Accidental injuries and property damage caused to others (such as a client who slips in your store) is covered by the general liability portion of your business insurance policy.
- Client information or customer data. If you want coverage for cyber attacks and problems such as data breaches, stolen information and cyber extortion, you’ll need to buy cyber liability insurance.
- Employment practices. Lawsuits arising out of claims of violation of your employees rights, such as wrongful termination or harassment are covered by employment practices liability insurance policy.
- Illnesses and injuries. Injuries and illnesses suffered by your employees while performing work-related tasks are covered under workers compensation insurance.
- Intentional or dishonest acts. This includes illegal acts and purposeful wrongdoing. Losses caused by international or dishonest acts are also not covered.
- Patents and trade secrets that you obtain without the owner’s permission are not covered by professional liability insurance if you are sued. A general liability policy might cover some costs if you steal intellectual property.
Exclusions to coverage may differ depending on your profession. For example, a professional liability insurance policy for a contractor may exclude coverage for injuries, but medical professional liability insurance covers injury claims.
Who Needs Professional Liability Insurance?
In some states, you may be required to buy professional liability insurance if a licensing board requires it. For example, real estate agents are required to show proof of professional liability insurance before they get their real estate licenses in more than 10 states.
Here are some examples of the types of businesses that could benefit from professional liability insurance:
- Accountants
- Architects
- Consultants
- Content marketers
- Counselors
- Engineers
- Graphic designers
- Healthcare professionals
- Insurance professionals
- Personal trainers
- Investment advisors
- Real estate agents
- Stockbrokers
- Tax preparers
- Technology professionals
How Much Does Professional Liability Insurance Cost?
Professional liability insurance costs an average of $61 per month, according to Insureon. Less than a third (32%) of Insureon small business policyholders pay less than $50 per month or $600 per year for professional liability insurance.
Your professional liability insurance costs will depend on a handful of factors:
- Your industry
- The size of your company and number of employees
- Your revenue
- The common risks that your industry faces
- Your business location
- Your claims history
- The coverage limits that you choose
What Is the Difference Between General Liability and Professional Liability?
There are some key differences between general liability insurance and professional liability insurance:
- General liability insurance covers accidental injuries and property damage caused to others. For example, if a customer slips on spilled liquid in your store and sprains their knee, your general liability insurance covers their medical expenses and legal costs if you are sued.
- Professional liability insurance covers claims of mistakes you made in the course of running your business. For example, if you are sued because you missed a deadline and caused your client financial harm, your professional liability insurance covers your legal costs, judgments and settlements.
How to Find the Best Professional Liability Insurance
Know How Much Coverage You Need
It’s important to figure out how much you’ll need based on your industry, size of your company and level of risk. It’s a good idea to speak with an independent insurance agent who can help you select the appropriate coverage amount.
The limits of professional liability insurance can range from $250,000 to $2 million. Most Insureon policyholders (63%) purchase a $1 million professional liability insurance policy.
Compare Insurance Quotes
Doing side-by-side shopping by comparing business insurance quotes from a few different insurance companies will help you determine what policy covers your bases at a reasonable cost.
Look for Discounts
Some insurance companies offer a discount for bundling professional liability insurance with other types of small business insurance.
Professional Liability Insurance Useful Terms: Negligent Acts, Errors and Omissions
When you’re shopping for professional liability insurance, you may come across terms such as negligent acts, errors and omissions. Professional liability insurance covers claims of negligence—when your company fails to show reasonable care in your service, resulting in harm to your customer.
Examples of negligent acts, errors and omissions include failing to deliver your work on time, providing inaccurate advice or omitting information, such as a real estate agent who forgets to include an important detail about a home.
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Professional Liability Insurance Frequently Asked Questions (FAQs)
What are the two main types of professional liability policies?
The two main types of professional liability policies are claims-made and occurrence-based. Most professional liability insurance policies are claims-made, which cover claims reported during the policy period. An occurrence-based policy means you’ll be covered for claims that happen during your policy period, even if the claim is reported after your policy expires.
What is proof of professional liability insurance?
A certificate of liability insurance is proof that you have professional liability insurance. Your client or profession may require this. A certificate of liability insurance includes basic information such as your coverage limits, name of your insurance company, policy number, and policy start and end date.
Your insurer should provide you with a certificate of liability insurance at no cost. If you lose your certificate or need another copy, you can typically get one through your insurer’s online portal or by contacting your insurance company.
Is professional liability insurance the same as errors and omissions?
Professional liability insurance is the same as errors and omissions insurance. It’s a form of small business insurance that covers your business against claims of mistakes in professional services, such as services that are inaccurate, late or never delivered. It covers your legal costs, judgments and settlements.
Is professional liability insurance tax deductible?
Small business owners can generally deduct the cost of business insurance from their taxable income, including professional liability insurance.
Other types of business insurance premiums that may be tax deductible include general liability insurance, commercial property insurance, commercial auto insurance and workers compensation insurance. But certain types of premiums cannot be deducted, such as premiums on disability insurance that covers your lost income or loan protection insurance. It’s a good idea to consult with a tax professional.
