The Small Business Guide To Professional Liability (Or Errors & Omissions) Insurance
Professional liability insurance goes by many names: Errors and omissions insurance, indemnity insurance, or malpractice insurance. But no matter what term is used, professional liability insurance protects your business from lawsuits that claim you gave bad advice or made a mistake. We all make mistakes and when we do, we hope the effects won’t be widespread or catastrophic, and we certainly hope people won’t sue us. But when things go wrong, people want someone to blame in our litigious society, so if you’re the person who gave the advice in a professional setting, you may be liable for the effects of those errors.
If your business is at risk from these types of lawsuits, then you’ve come to the right place. We’ll explain exactly what professional liability insurance is, what it covers, how to get it, and how much it’ll cost. Continue reading to learn more.
Table of Contents
What Is Professional Liability (E&O) Insurance?
Professional liability insurance protects small business owners from the cost of a lawsuit if you or an employee is negligent on the job. If your small business works in the service or advice-giving industry, a general liability policy is generally not enough coverage to handle potential lawsuit claims. In the event of a claim of negligence, misrepresentation, malpractice, or errors and omissions that resulted in harm, this policy will cover your defense.
Depending on the occupation, negligence could look like a misdiagnosis of a problem, failure to give proper instructions for a piece of equipment, or accidentally deleting important files. A professional liability policy is the only policy that truly protects from employee errors and mistakes of this nature.
What Professional Liability Insurance Covers
A professional liability (E&O) insurance policy will cover:
- Employee Negligence, Alleged Or Actual: These are the errors or omissions claims that people might bring against you or your business. If you overlook a crucial piece of paperwork, give bad advice, or miscommunicate and create something a client didn’t want, this policy was designed to cover those mistakes.
- Defense Costs: In the event that you or your business is sued for professional negligence, your policy will pay for your defense costs.
- Claims & Damages: And in the event that the claim has merit and the plaintiffs are awarded damages, your policy will pay those.
- Defamation, Libel, Or Slander: This policy will also cover the cost of a lawsuit related to libel (publishing untruths) or slander (saying untruths) about a client or a competitor.
- Copyright Infringement: Someone comes after you and says you stole their work? Professional liability insurance helps cover the costs of your defense.
What Professional Liability Insurance Doesn’t Cover
Indemnity policies have specific clauses that outline what is and isn’t covered. While professional liability is important to have, it won’t cover all your small business risks. A professional liability (E&O) insurance policy will not cover:
- Intentional Or Illegal Activities: Right. So…this policy doesn’t cover illegal acts or intentional acts of negligence on the part of your employees.
- Employee Injury Or Accident: If your employee is injured on the job, that injury is covered under worker’s compensation insurance, not professional liability insurance policy.
- Property Damage: Third-party property damage is covered under a general liability plan or a commercial property plan.
- False Advertising: A general liability policy would also be enough to cover your business against a false advertising claim.
- Bodily Injury To A Client: Once again, general liability, also called “slip and fall” insurance, is the coverage needed to protect yourself from a lawsuit if someone is injured on your property.
- Non-Work Related Accidents: You’re going to start to detect a theme. Yup, general liability is the policy that covers non-work related accidents.
- Data-Breach Protection: If you have access to private client information, protecting that information is crucial. Data-breach insurance or cyber insurance are the policies to look for to protect your business from irresponsibility with information.
Who Needs Professional Liability Insurance?
Most professionals or small business owners who work with clients could benefit from a professional liability policy. However, some occupations require a professional liability policy in order to practice (specifically lawyers and doctors).
Note: doctors may need additional malpractice insurance as well as a professional liability policy. Always talk to an insurance expert in your state about legal requirements.
If you aren’t sure a professional liability policy is the right fit for your business, ask yourself these questions:
- Do you give people advice?
- Do people make decisions based on your professional opinion?
- Could an employee make a clerical error that could cost your company money?
- Could a disgruntled client say you misdiagnosed a problem?
- Could someone else’s error cost you time and money and potential clients?
If you can say ‘yes’ to any of them, consider adding professional liability coverage.
How Professional Liability Insurance Works
Professional liability insurance protects your small business from lawsuits and claims that say your business was negligent, didn’t deliver on its promises, made a work mistake, or gave bad advice. If someone sues you for any of the above reasons, then your insurance company will dispatch a team to your defense. Assuming you have picked an adequate amount of coverage needed for your business, the insurance company will also pay out any claims.
Types Of Professional Liability Insurance
There are two types of policies you can choose from when buying your professional liability insurance policy.
This policy protects you from a lawsuit if you had professional liability insurance at the time of the occurrence of the claim. Even if you do not currently have coverage, you’d be entitled to defense costs.
This policy protects you from a lawsuit if you had professional liability insurance at the time of the occurrence of the claim and at the time when the lawsuit was filed. If you’ve let your insurance lapse, the lawsuit isn’t covered.
Additional Types Of Professional Liability Insurance
Liability insurance is the foundation for all insurance. Errors and Omissions is only one type of liability insurance you may purchase to offer coverage to your small business, and if it’s useful for you, by all means, buy it — but professional liability should be one aspect of your risk management plan. Odds are, you are going to need multiple insurance plans to safeguard your business.
While it isn’t fun and pretty, making a list of worst-case scenarios and detailing which insurance plan keeps you the most protected from those things is a good idea. Being uninsured is hard and difficult, but what’s even more difficult to find yourself underinsured? Thinking you’re protected when you’re not.
Depending on your company’s needs, it’s important to look into various other types of insurance policies in order to fully protect your small business. Don’t know where to start? Here is a list of other liability insurance options and how they might help.
|Insurance Type||What It Does||Who It's For|
Often called "slip and fall" insurance, this insurance protects your business from the threat of a lawsuit.
Directors & Officers Liability
This insurance protects the company and its directors from frivolous lawsuits.
A business with figureheads that could attract legal attention
Protects your business from the costs of a data breach or hacking or other cyber crimes.
Businesses that gather information about clients and store it online
Protects your buildings and things inside your buildings from damage and accidents.
Businsses with a physical property site and products located in those physical locations
Protects a business from a lawsuit related specifically to the product it sells.
Any business that manufactures, sells, or distributes a product
Pays your workers salary and medical bills in the event of an on-the-job accident or injury.
All businesses with one or more employees
If your business has to stop because of property damage, this will cover the cost of moving your business to a new location.
Businesses that need a specific location to keep open
How Much Does Professional Liability Cost?
As with all insurance policies, the cost is determined by your needs and the size of your business. The more clients you have, the more employees, the more opportunities for mistakes and the higher your policy will be.
The company Insureon researched professional liability costs across professions and discovered the median cost was $920 a year, according to their data, and over half of those businesses paid less than a $1000 a year. They also determined that the business industry and business size were the two most important factors for cost. There are certainly ways to lower the monthly cost as well. The biggest would be to raise the deductible on the policy (you’ll pay more only if you are sued; more money stays in your hands month to month).
Check prices on places like Insureon, Coverhound, or Coverwallet, which compare prices across a variety of insurance carriers. Talk to an insurance expert about ways to save by bundling this liability insurance with other policies as well.
How Much Professional Liability Coverage Do I Need?
When you purchase a professional liability policy, you will need to decide how much coverage to invest in for your company. Professional liability is sold in increments of one million dollars. According to legal websites, a lawsuit could cost anywhere between $5,000 to $50,000 to defend and that’s not including claims against a company which can start in the millions of dollars. (According to the Tech Insurance Blog, small business owners paid a total of over $35 billion dollars last year in out-of-pocket payments from lawsuits.)
Once you’ve decided how much coverage is enough (one million or more), your business can make decisions about deductibles and other cost factors.
Risk management is an important part of your small business. All of us who own small businesses know that we put our hearts and souls into the work we do. Mistakes can and will happen, and we can’t always count on the graciousness of others to work through those mistakes. Adding professional liability to a business owners policy or general liability policy is a good investment into your company.
When you purchase professional liability, you are not only protecting your assets, you’re protecting your name and your brand and the quality of the work you do. Once you’ve decided to make that investment, check out these simple steps to acquiring business insurance.