Professional liability insurance is a third-party liability insurance for small businesses in the professional services sector. It’s sometimes called errors and omissions (E&O) insurance, or medical malpractice insurance for those in a medical profession. Unlike general liability insurance, a professional liability policy covers more intangible claims, such as the business provided bad advice, and more concrete claims, such as breach of contract.
Expect professional liability insurance to cost more than general liability. Most small businesses pay anywhere from $50 to $100 a month for professional liability insurance.
What Is Covered by Professional Liability Insurance?
Here’s a list of common claims covered by professional liability insurance, along with example scenarios that show how claims may arise:
- Mistakes: If your certified public accountant (CPA) firm makes a clerical error on a client’s taxes, resulting in an audit of that company’s finances by the IRS, the company could sue for the expense of the audit.
- Bad advice: If your business consulting firm advises a small business to expand into a new market and the expansion causes financial harm to the company, the company may pursue legal action.
- Missed deadlines: If your bakery fails to deliver a cake to a wedding, this could be considered a missed deadline.
- Breach of contract: If your business assists companies in launching products and breaks the embargo, resulting in an early leak about the product to the press, the client could claim this was a breach of contract that caused financial harm.
- Copyright infringement: If your business produces work that is the same as, or similar enough to, copyrighted work, the original owner of the work could file a lawsuit against your company.
- Undelivered services: If your photography and videography company doesn’t film the bride walking down the aisle, the newly married couple could claim you failed to deliver on the promised services.
- Defense costs: While a claim includes more than just the cost of defense services associated with being sued, defense costs can still make up a significant portion of the claim. Professional liability will help pay defense costs like attorney fees if your business is sued.
Keep in mind that this list isn’t exhaustive of all the scenarios where professional liability may come into play.
Professional Liability Insurance vs General Liability Insurance
Professional liability and general liability are third-party liability policies you can buy to protect your small business, and they are very different.
Here’s one way to think about the distinction between the two types of insurance:
- General liability is broad and is not related to specific intangible services a business may provide, like financial advice or consulting services
- Professional liability covers claims for many of these intangible services
Professional liability and general liability are third-party liability policies you can buy to protect your small business, and they are very different.
Here’s one way to think about the distinction between the two types of insurance:
- General liability is broad and is not related to specific intangible services a business may provide, such as financial advice or consulting services
- Professional liability covers claims for many of these intangible services
Professional Liability Insurance Costs
The Hartford shares the average cost its policyholders pay for professional liability for five different industries. The average monthly cost for all of those is $109. Insureon states that the monthly average is $61 and that 40% of its customers pay anywhere from $50 to $100 a month.
In my own research, I obtained six quotes for professional liability insurance. The average ranged from $82 to $142 per month for $1 million in coverage.
As with other types of small business insurance, providers consider several factors when determining a premium, the most common of which include:
- Size of your business
- Annual revenue
- Type of industry
- Geographic location
- Claims history
- Amount of coverage
If you are looking to purchase professional liability insurance, you can do so through a broker, an agent, or directly from an insurance company. We’ve done the work of researching the best professional liability insurance companies, taking into account cost and the industries covered.
As you’ll see below, reviewing the policy’s wording is especially important when shopping for professional liability insurance. I recommend discussing the wording and coverage with the company before purchasing the policy to ensure you know exactly what type of coverage you are buying.
Depending on the industry, some providers may offer a combination of general liability and professional liability coverage, sometimes bundled with commercial property insurance. However, usually in these offerings the limits of the professional liability policy are very low.
How Professional Liability Insurance Coverage Works
Insurance companies write professional liability policies in different ways. The most common type is a claims-made policy. With it, the policy must be active when the claim is filed. Because of this stipulation, this policy type comes with some special additions that may need to be purchased:
- Retroactive date: For a claims-made policy, a retroactive date is the date you and the insurer agree upon for when coverage begins. The date can precede the actual start date of the policy. For example, you can purchase a policy in 2016 with a retroactive date of July 1, 2015. The purpose of the retroactive date is to protect the insurer from having to pay for past losses that may pop up in the future.
- Extended reporting period: This addition is the opposite of a retroactive date and extends coverage past the expiration of the policy in case a claim is filed after the policy expires.
The less common type of professional liability policy is an occurrence policy. This covers losses that occurred when the policy was active, regardless of when the loss is reported.
For example, you had a professional liability policy from 2016 to 2018 and then let it expire and never purchased another policy. In 2021, a company filed a suit for breach of contract on a project completed in 2017. Because this occurrence happened while the policy was active, it doesn’t matter that the claim is being filed after the policy has expired.
Who Needs Professional Liability Insurance Coverage?
Generally, small businesses that offer professional services need to at least consider professional liability insurance. While the following list isn’t inclusive of every profession that should consider professional liability, some of the common ones are:
- Consultants
- Engineers
- Real estate agents
- Public insurance adjusters
- Financial advisors
- Architects
- Lawyers
- Medical professionals
- Independent contractors
So, how do you decide whether professional liability is right for you? Ask yourself these guiding questions:
- Does my business provide a service to others?
- If something goes wrong, could it lead to problems?
If you answer yes to both questions, then you should purchase professional liability insurance.
Bottom Line
As a critical part of a successful business plan, professional liability insurance can protect your small business in areas not covered by general liability insurance. On average, a policy will run anywhere from $50 to $100 a month.
The Hartford, with over one million small businesses insured, is a leading provider in small business insurance. You can get a quote online or speak with an agent to determine the right coverage for your business.
