The Small Business Guide To Professional Liability (Or Errors & Omissions) Insurance

If you own a professional practice or have looked into starting one, you’ve probably asked yourself: What is professional liability insurance? This insurance policy goes by many names — errors and omissions insurance, indemnity insurance, and malpractice insurance are terms you may have seen used. They provide the same basic protections across the board. 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 harmful, and we certainly hope people won’t sue us. But when things go wrong, you may be liable for the effects of those errors if you gave the advice in a professional setting or hurt someone while providing your service.

If your business is at risk from these types of lawsuits, 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 costs. Continue reading to learn more.

What Is Professional Liability (Or Errors & Omissions) 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 provides services or professional advice as part of its business model, a general liability policy typically isn’t enough coverage to handle potential lawsuit claims. A professional liability insurance policy will cover your defense if you’re faced with a claim of negligence, misrepresentation, malpractice, or errors and omissions that resulted in harm.

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.

How Does Professional Liability Insurance Work?

Professional liability insurance protects your small business from lawsuits and claims that  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. The insurance company will also pay out any claims if you picked an adequate amount of coverage needed for your business.

Types Of Professional Liability (Errors & Omissions) Insurance

There are two types of policies you can choose from when buying your professional liability insurance policy:

• Occurrence-Based: This policy protects you from a lawsuit if you had professional liability insurance at the time of the occurrence of the claim. So if the occurrence took place two months ago while you were insured, but you currently do not have coverage, you’d still be entitled to defense costs.
• Claims-Made: This policy protects you from a lawsuit if you had professional liability insurance at the time of the claim’s occurrence and when the lawsuit was filed. If you’ve let your insurance lapse, the lawsuit isn’t covered.

Additional Types Of Professional Liability Insurance

Professional liability is just one type of liability insurance you may purchase to offer coverage to your small business. If it’s useful for you, then buy it — but professional liability can’t be the only part of your risk management plan. Odds are, you will 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, but what’s even more difficult than finding 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 to protect your small business. Don’t know where to start? Here is a list of other liability insurance options and how they might help.

What Does Professional Liability Insurance Cover?

Should your business be found liable for harm that resulted from incorrectly provided services, then professional liability insurance covers the damages associated with the claim. This could be as simple as unmet expectations on the part of a client or even negligence in your business practices.

Because professional service is at the crux of what could go awry, the range of instances and events this kind of insurance will cover is a bit broader than the coverage one finds for bodily injury and property damage in a general liability policy. (If you’re still confused as to why professional liability insurance is also called errors and omissions insurance, the easiest way to think about it is that this insurance will cover you if there are errors and/or omissions in the services you provide.)

What Professional Liability (Errors & Omissions) Insurance Covers

A professional liability (E&O) insurance policy will cover the following:

• Employee Negligence, Alleged Or Actual: These are the errors or omissions claims that people might bring against you or your business. This policy was designed for certain mistakes. For example, if you overlook a crucial piece of paperwork, give bad advice, or miscommunicate and create something a client doesn’t want.
• Defense Costs: If you or your business is sued for professional negligence, your policy will pay for your defense costs.
• Claims & Damages: Building off the prior point — if 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 (Errors & Omissions) 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 the following:

• Intentional Or Illegal Activities: This probably comes as no surprise, but this policy doesn’t cover illegal acts or intentional acts of negligence on the part of your employees. (Don’t let this confuse you — actual negligence isn’t always intentional negligence. So if your employee accidentally overcharges or gives misinformed advice, you’ll still be protected.)
• Employee Injury Or Accident: If your employee is injured on the job, that injury is covered under worker’s compensation insurance, not a 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 help protect your business against false advertising claims.
• Bodily Injury To A Client: 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. However, if you’re a medical professional and accidentally injure a patient, medical malpractice insurance will also protect you in this case.
• 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 What Professional Liability (E&O) Insurance?

Most professionals or small business owners who work with clients could benefit from a professional liability policy. However, some states require certain occupations to have professional liability coverage 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, money, and potential clients?

If you can say ‘yes’ to any of them, consider adding professional liability coverage.

How Much Does Professional Liability (Errors & Omissions) Insurance Cost?

According to Insureon, professional liability costs between $500 and $1,000 a year for most small businesses. Some even pay as low as $500 a year.

Bear in mind that your needs and the size of your business determine the cost of your business insurance policy. You’ll need higher coverage for the more clients you have, the more workers you employ, and the more opportunities for mistakes there are. All of this translates to a higher premium. Business industry and business size are the two most important factors for cost.

If you’re looking for ways to lower the monthly cost of your errors and omissions insurance, raising the deductible on the policy is the biggest. You’ll pay more only if you are sued; more money stays in your hands month-to-month.

How To Get Professional Liability (Errors & Omissions) Insurance

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 owner’s policy or general liability policy is a good investment for your company.

1) Determine How Much Coverage You Need

Specifically, you’ll want to address these potential risks:

• How costly is a potential mistake that your business could make?
• How likely is it that an error or omission could occur in the service your business provides?
• How many employees do you have?
• Will your payroll be affected if you can’t pay for a drawn-out court case?
• What state is your business located/practicing in?

It’s key that the coverage you purchase can keep you from having to pay any legal fees or damages out of pocket. A good place to start is a $1 million policy, but depending on the clients you work with and the services you provide, you may want to pursue higher limits.

2) Research The Market

Once you’ve done your homework and know what coverage will best protect your business’ financials, you’re ready to hop into the market.

Insurance carriers that sell business insurance policies typically also carry professional liability insurance. That said, you may be able to add professional liability insurance to your policy if you’re currently insured.

According to Investopedia, AIG was the top overall insurance provider for professional liability insurance. Thimble was ranked the best for small businesses, Pogo was top-rated for freelancers, Embroker was the best for lawyers, and The Doctors Company came out on top for medical and healthcare professionals.

3) Shop For Quotes

Now it’s time to get insured! Check prices on 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.

When you purchase professional liability, you’re not only protecting your assets — you’re protecting your name, brand, and the quality of your work. Once you’ve decided to make that investment, check out these simple steps to acquiring business insurance.

Professional Liability (Errors & Omissions) Insurance FAQs