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What does Professional Liability Insurance cover?

Small business owners can be protected by professional liability insurance in the event of an error or omission during their professional duties. This policy generally covers financial losses from unintentional acts or omissions rather than bodily injury or property damages. Professional liability policies protect against claims based on honest errors as well as unfounded allegations made by customers.

How Professional Liability Insurance Works

Professional Liability Insurance also known as errors and omissions, protects clients from claims that you are negligent or that your work does not meet professional standards. Policyholders are covered for losses if they are accused of making mistakes, providing bad advice, failing to deliver promised services, or making other negligent acts.

Professional liability losses are usually financial in nature and could be due to:

  • Your client will be awarded a judgment
  • Settlements between the plaintiff and you
  • Your defense costs

Professional liability covers errors and omissions that are not intentional. However, small businesses could also be subject to frivolous claims from customers who perceive negligence. Unintentional acts can cause economic loss or mismanaged times for clients. Claims without a legal basis may be as costly and lengthy as claims with merit.

What Professional Services are Covered?

Your services will determine what is covered by professional liability insurance. An engineer, for example, needs to protect her design and structural decisions. While an accountant must worry about his bookkeeping accuracy or tax analysis, an accountant will need to be covered. 

Because of the language in the insurance agreement, professional liability insurance can cover all their individual risks.

Professional Liability Insurance Agreements

The professional liability policy’s insuring agreement outlines the coverage your insurer will cover. This agreement typically summarizes your coverage in broad terms. It states that your insurer will cover a client’s loss if they file a claim for negligence arising from your professional services.

A majority of professional liability policies define a “wrongful act” as any act or omission that is actually or allegedly caused by negligence, errors or omissions. Wrong acts can be described as the situations covered by your professional liability insurance policy. Courts have found many scenarios that fall within the broad category of wrongful acts over time. Below are five examples of what does professional liability insurance cover:

1. Errors or omissions

It’s considered negligence if you make an error in rendering professional services. Professionals have a duty to care. This means that you must avoid any actions that may cause harm to your clients. This duty of care may be breached if you make mistakes or omit information.

If you accidentally use incorrect dimensions to calculate square footage for a project, it could be an example of an architect. The client must correct the issue immediately. This will delay the project’s completion. The client can sue to claim that a professional architect has the knowledge and experience to calculate the square footage of a space.

2. Misrepresentation

In professional services, misrepresentation can be understood as either making promises you can’t keep or exaggerating one’s abilities.

For example, an electrician might take full payment upfront to rewire a whole house. After stripping the wiring, you abandon the project when there are more projects. Your client sues you because you have already taken payment but failed to finish the project.

3. Bad Advice

Incorrect advice can cause financial loss and bodily injury. These statements can result in claims.

Imagine you are an accountant and tell your client that he doesn’t need to declare a particular item on his taxes. But then, he is audited and it should have been. You should not have made assumptions as a professional and could be held responsible for making them wrong.

4. Violation of Good Faith

Failing to give clients accurate and complete information in order for them to make informed decisions is a violation of good faith. Your clients trust you because you are an expert. It is a breach of this trust if you withhold or alter information that is vital to your clients.

Imagine that you are a financial advisor, and are legally required to protect your clients’ interests. You sold stock to your client in a company that you knew the CEO of without disclosing the relationship. Your client could sue you if the stock loses value. Professional services businesses should avoid conflicts of interests and inform clients about all facts.

5. Copyright Infringement & Defamation

Advertising injuries are not covered by most professional liability policies. They are however covered by general liability insurance. Professional liability might cover a business that is exposed to these risks due to actions such as marketing companies or public relations firms. Professional liability may cover some advertising injuries.

  • Copyright Infringement: Reproducing and distributing copyrighted works without consent
  • Defamation Publishing (libel), or making false statements, (slander), that cause reputational harm
  • Plagiarism Copying work from another person’s as your own
  • Invasion in privacy: Intruding on someone’s private life without justification

These claims are usually exclusions from professional liability policies. These claims are often exclusions under most professional liability policies. Businesses should inquire about media coverage.

Professional Liability Insurance Doesn’t Cover

Professional liability insurance does NOT cover acts of fraud, negligence, or harm. Your carrier will decline to pay a claim if evidence is presented that you intend to deceive or mislead a client. Gross negligence, which is an act of reckless disregard for another person, is not covered by many policies. If the risk is inherent to their professions, doctors, architects, engineers and other professionals may be eligible for coverage for bodily injury or property damage.

Common Professional Liability Exclusions

Since professional liability policies aren’t standardized, each carrier has its own list of exclusions. Although exclusions can vary by industry and may be specific to certain industries, you will find some common elements in professional liability policies of many carriers. Here are some examples:

  • Punitive damages
  • You or another insured commit dishonest, fraudulent or criminal acts
  • You were aware of wrongdoings before the policy was created
  • You have reported wrongdoings or claims under a prior policy
  • Property damage or bodily injury
  • Contract liability
  • Fee disputes
  • Profits that you have illegally earned
  • Inability to keep insurance
  • Discrimination on the basis of race, sex or creed
  • Pollution
  • Any goods or products may be sold or distributed
  • Radioactive contamination, radiation and nuclear projects
  • Repair or replacement of faulty workmanship will cost you money

Professional Liability vs. Errors and Obmissions

The two are basically the same thing: professional liability insurance and errors and/or omissions insurance. Tomato, tohmato–right? These terms are often used interchangeably. However, the name of your coverage will depend on your industry. Professional liability policies can be tailored to your specific profession.

Businesses in certain industries, like technology companies, require provisions to protect them against lawsuits that may arise from data breaches. Every industry has its own specific requirements and clauses in professional liability policies.

General Liability vs. Professional Liability

The distinction between professional liability and general liability refers to the risks they cover. General liability insurance covers all risks that a business may face by simply opening its doors. This includes slip-and fall accidents and property damage involving employees.

Professional liability insurance protects against risks specific to the business owner’s industry. A business owner who presents herself as an expert is responsible for following all instructions and being professional. Professional liability protects against this type of risk. Except in limited cases, professional liability does not cover physical injury.

Professional Liability and Malpractice

This is a special type of professional liability insurance for healthcare providers and professionals, such as doctors, dentists, and nurses. This policy protects them from patient claims of negligence or mistakes. It is also possible to cover bodily injuries if a professional liability policy is in place. Only a few states require doctors to have minimum malpractice insurance. However, most healthcare professionals need this coverage as a lawsuit could prove financially disastrous to their business.

Claims-Made vs Occurrence Based Professional Liability Policies

Two types of professional liability insurance policies are available: occurrence-based and claims-made. Professional liability insurance policies are usually set up as claims-made policies. This means that any claim filed during the policy period triggers the policy. As long as the event is covered by your policy and the claim is being filed, it doesn’t matter what year it was. Your insurer ceases to be responsible for claims once a claims-made policy has ended.

Occurrence-based insurance policies cover claims that were made while your policy was in force, regardless of when they were filed. Although your client can sue you after your policy expires, your insurer will still cover the claim as long the triggering event (the wrongful act) occurred during your policy term. Because they offer more coverage over a longer time, Occurrence-based policies tend to be more expensive.

 Coverage

Insurance coverage that covers claims-made errors or omissions may also have coverage for prior acts, also known as a retroactive date. This excludes events that occurred before the policy began date. To be covered, the triggering event must have taken place on or after that retroactive date. Professional liability policies may also provide full coverage for prior acts, which provides protection for all your activities with no retroactive date.

Limits on Professional Liability Insurance

Your policy limit will determine how much your insurance company pays if your business is subject to professional liability claims. Most errors and omissions policies have both an individual (per occurrence), and an aggregate limit. While professional liability insurance covers settlements up to the policy limits, some policies do not cover defense costs. Your business’s risk will determine how much you need to cover each occurrence. This can be determined by your professional insurance provider. Limits can start as low as $250,000.

Defense Within Limits and Outside of Limits

When it comes to legal defense coverage, there are two types. First, defense within the limits means that all defense costs such as attorney fees, court costs and damages are taken out of the policy limit.

These costs are covered by defense beyond the limits coverage. They do not affect your policy limits and leave more money for settlements or judgments. If you have to pay a judgment beyond your policy limits, this can make a huge difference. The extra costs will come out of your pocket once you have reached your policy limit.

Additional premiums are required for defense costs beyond the normal limits. Because they do not place a limit on defense costs, professional liability carriers may be reluctant to offer policies that have no eroding limits. This could expose insurers to excessive costs.

Who is covered by Professional Liability Insurance

Professional liability insurance is required if your business offers professional services to clients. These are the most common professions:

  • Accountants
  • Architects
  • Consultants
  • Doctors
  • Engineers

Traditional professionals aren’t the only ones who can be sued. Other business owners may also be subject to professional liability, such as insurance agents, IT businesses, lawyers and notaries. These owners are more likely than others to receive errors and omissions coverage. It’s a smart idea to get coverage if you are negligent in any industry or field.

Bottom Line

Professional liability policies protect service providers and professionals from losses and claims arising from errors in job performance and delivery. Even if the claim is not legitimately made by a client who is unhappy, errors and omissions covers your business’ defense and possible settlements.

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