Whether you’re a hair salon owner, veterinarian, accountant or architect, you need professional liability insurance. Also known as errors and omissions (E&O) insurance, it protects your business from legal action resulting from mistakes or negligence in your professional services.
Many professional liability policies are claims-made, meaning they only cover incidents that happen while the policy is in force — not those that occur earlier. However, some insurers offer extended reporting periods or tail coverage endorsements to fill this gap. Click on Insurance Agency Outsourcing Services for more information.
Coverage
Professional liability insurance, also known as errors and omissions (E&O) coverage, protects your business against claims of negligence or harm that stem from the performance of a professional service. Unlike commercial general liability policies that cover bodily injury and property damage, professional liability insurance typically covers only economic or financial losses suffered by third parties.
Whether you botch a customer’s dye job at your hair salon or misdiagnose Fido’s upset stomach at your veterinarian office, the consequences of such mistakes can be devastating for your business. While the decision to purchase E&O coverage is a personal one, most professionals can benefit from having it. In addition to protecting your business from costly legal action, a certificate of insurance can help build trust with clients and licensing boards. Most professional liability policies operate on a claims-made basis and pay for defense costs incurred, up to the policy limits. However, there are important differences between policies. Read on to learn more about these differences and how they may affect your coverage options.
Exclusions
Many professional liability policies exclude bodily injury (which must be caused by an occurrence) and personal and advertising injury that are not directly related to an insured’s professional services. Some policies also exclude intellectual property infringement claims.
For example, suppose a web designer uses a copyrighted image on a client’s website without permission and is sued for infringement of the owner’s intellectual property rights. The insurer may not defend this claim if it is excluded under the policy.
Another common exclusion is for any claims arising out of the furnishing or failure to furnish any professional services. A significant amount of litigation surrounds the scope of this exclusion, so it’s important for policyholders to closely examine their policy and consider which activities could trigger this limitation. Bodily injury, such as when clients or customers fall while visiting a business’ offices, and property damage, such as when files are lost in a fire, are typically covered under commercial general liability policies, not professional liability policies.
Claims-made or occurrence policies
For those in high-risk industries, the choice between claims-made and occurrence policies will impact long-term protection. Physicians, for instance, need to decide whether a claim-made policy with an extended reporting period (ERP) or tail coverage will protect them when they change employers or retire. If they leave a firm without an ERP or tail, their former employer could still sue them after a malpractice lawsuit resolves or the statute of limitations expires.
A claims-made policy only covers incidents that occur and are reported during the policy period, whereas an occurrence policy has no time limit for coverage. This can be a problem if a potential incident is not reported before the policy expires, but an ERP or tail can be purchased to cover these incidents. This may increase your premium costs, however. It is important to understand these details so you can make the best decision for your needs. This includes taking steps to reduce your risk and decrease your premium over time.
Premiums
Insurers determine premiums based on the estimated likelihood and cost of industry lawsuits. Your profession, the type of work you do and where your business operates also impact your rates.
In many cases, your insurer will cover legal fees, settlements and judgments up to a policy limit. Typically, professional liability policies include a $1 million limit for a single claim (the “occurrence limit”) and an aggregate limit that lasts the lifetime of the policy.
Many professionals use this coverage to demonstrate their commitment to upholding client standards. Some clients will ask you to have this insurance in place before agreeing to work with you.
Some professional liability policies feature shrinking limits, which means that your insurer’s payment of defense costs reduces the available policy limit for indemnity claims. Talk to your broker about selecting the right limit for your needs. You can also purchase additional protection with endorsements or add-ons to your professional liability insurance.
