Even if you're in the insurance business yourself, you may not specialize in professional liability coverage. Read on for a primer on this type of insurance.
Professional liability insurance is also known as "professional indemnity insurance". In the United States, it is commonly called errors and omissions insurance.
This is a form of liability insurance that protects professional advice and service-providing individuals and companies from bearing the full cost of defending a negligence claim by a client. This will also cover the damages awarded in such a civil lawsuit.
The coverage focuses on the financial loss caused by failure to perform, errors and/or omissions in the service or product sold by the policyholder.
Normally, this type of policy will cover:
- Alleged or actual negligence claimed by a client.
- Defense costs. This will cover the cost of defending in a civil lawsuit, even if the case is meritless, unfounded or frivolous.
- Settlement costs.
- Personal injury that is a result of rendering professional service. (e.g. Libel or slander)
- Copyright infringement
- Worldwide errors and omissions coverage. The policy will cover work performed around the world, as long as the claim is filed in the United States and its territories.
- Temporary staff and independent contractors. The policy will also cover claims arising from business-related services performed by a company’s employees, temporary staff and independent contractors.
There are even insurance carriers which cover claims arising from services rendered in the past. Most errors and omissions carriers will only cover services performed from the time the policy is purchased. However, there are carriers which have retroactive coverage. That is, you become covered for services performed in the past, even before your professional liability insurance policy was purchased.
An IT consultant installs software changes for a client. Because the consultant disabled the firewall to facilitate the installation, hackers were able to access the company’s database. In such a situation, the client may sue even if the consultant’s actions were unintentional. The insurance will have to cover the cost of defense and the damages awarded to the client who sued, up to the policy limit.
A real estate agent represents a purchaser of real property. After the sale was completed, various problems on the property are discovered. In addition to bringing suit against the seller of the property, the purchaser sues the agent for negligence and for failure to disclose the conditions of the property.
A website developer is engaged in setting up an e-commerce site for a toy company. The developer failed to meet the established deadlines. The toy company sues for the loss of revenues due to the inability of the developer to meet the deadline. The insurance carrier will have to cover the defense cost and the damages awarded to the client who sued.
In the medical profession, this insurance is typically called malpractice insurance. Other professionals who typically purchase errors and omissions or professional liability insurance include insurance agents, consultants, brokers, lawyers, accountants, engineers and other construction and maintenance professionals. Other service providers who face the risk of being sued for negligence even include wedding planners, photographers, etc.
What is/are not covered? Errors and omissions insurance will certainly not cover fraudulent or illegal activities. Further, it will not cover intentional acts of negligence. This policy will only respond to economic losses.
Damages and claims for third party bodily injury and claims for property damage are not covered by such a policy. These claims are covered by your separate general liability insurance. Further, false advertising claims are not covered.
So how much does professional liability insurance cost? The cost varies from carrier to carrier. As with any type of liability insurance, your premium will be determined by several factors- the type of services you offer, the size of your business, your customer base, your business location and the level of protection you choose.
There is no average amount of professional liability insurance cost for small and large organizations because the amount of premium really differs from one organization to another. For sole traders and consultants, annual premiums start at $380.
Of course, such amount increases as the organization grows bigger, as more people or employees are involved, as more activities are engaged into by the policyholder, as risk generally increases.
Typically, many insurance carriers will cater to your insurance needs. The coverage can be tailored to your specific profession or business.
You can choose your policy coverage from a policy limit of $500,000 to $20 million. You will only have to pay for the coverage that you really need.
Further, you can also choose your deductible amount. The standard amount of deductible is $5,000 but you can choose from a wide range of deductibles from zero to $25,000. Typically, the higher your deductible, the lower is your premium, as you take on more of the risk.