The people who need professional liability insurance are usually business owners who make a living by providing advice or services to others. Because these individuals have specialized knowledge and present themselves as authorities, they are exposed to accusations that their mistakes led to financial losses for their clients. Professional liability covers these claims.
How Professional Liability Insurance Works
Professional liability insurance pays for your legal defense if a client claims your work caused her to lose money. If a covered event occurs, like a negligence claim, you alert your insurer who can then guide you through the next steps like contacting a lawyer or gathering pertinent documents.
People who need professional liability insurance can face negligence claims like:
- Work errors and omissions: An accountant making an error on a client’s balance sheet or an IT consultant omitting key steps in a client’s security program
- Providing inaccurate advice: A doctor whose poor medical advice causes a patient’s health to deteriorate
- Failing to provide services as promised: An architect whose design does not match project specifications
Professionals need to live up to a generally accepted standard of care, and clients may sue for negligence if they think you’ve failed to meet it. Professional liability covers these claims by paying for attorneys and court costs as well as any judgments or settlements in the case.
Other Names for Professional Liability Insurance
Professional liability insurance goes by a couple of other names, often depending on your industry. Traditional professions such as architects and doctors, most commonly use the terms professional liability or malpractice insurance. Other professions, sometimes called semi professions, are more likely to use the term errors and omissions or E&O insurance.
8 Professionals Who Need Professional Liability Insurance
The following is a list of professionals and semiprofessionals who need errors and omissions insurance. While only physicians, dentists, and lawyers are required by law to carry coverage, and then only in certain states, other business owners may want the peace of mind errors and omissions insurance can bring.
Physicians Need Medical Malpractice Insurance
Medical malpractice insurance is an industry-specific professional liability policy for doctors, dentists, and nurses. No federal law makes medical malpractice insurance mandatory, but seven states require physicians to carry a minimum amount of coverage. Another 11 states require it in order for physicians to qualify for liability reforms.
Even if medical malpractice insurance isn’t mandated by law, the likelihood and cost of malpractice lawsuits make coverage necessary. According to a report based on data from the National Practitioner Data Bank the total cost of malpractice suits increased by 2.91% in 2018 with an average payout of $348,065.
Architects Need Professional Liability Insurance
Because they design and renovate buildings for clients, architects typically need professional liability coverage in case someone says their plans fall short of sound architecture practices. For instance, an architect might be sued if her design is unworkable or fails to meet project specifications. Plus, architects often take on other roles such as project coordinator, and may be sued for failing to get permits, cost overruns, and other tasks.
Architect professional liability insurance isn’t required by law or for licensing; however, many architects get coverage even when they are employees in a firm. While the firm’s professional liability usually extends to its employees, the coverage may be limited to a specific set of work tasks. Having your own policy ensures you’re fully covered.
Engineers Need Professional Liability Insurance
Much like architects, engineers in all disciplines can be accused of not using sound engineering principles when planning a project. For example, clients may sue if they believe your miscalculations caused anything from cracks in the drywall to a wall collapsing. The cost of these claims makes professional liability insurance necessary, even if it’s not required for your license.
Lawyers Need Legal Malpractice Insurance
Legal malpractice insurance is a special form of professional liability designed to protect lawyers if they’re accused of negligence. Only Oregon and Idaho require attorneys to get legal malpractice insurance, but more states are looking into it. However, a recent American Bar Association study shows that 75% of lawyers are sued for malpractice and that 70% of those lawsuits target firms with five or fewer attorneys, making professional liability coverage a smart investment for most lawyers.
Lawyers employed by corporations as in-house counsel can get coverage specifically designed for their risk, as can solo practitioners. These policies are often called employed lawyer professional liability insurance.
Counselors Need Errors & Omissions Insurance
Professional liability insurance for counselors isn’t typically required for licensure, but mental health professionals should consider getting coverage because of the intimate nature of their work. The combination of personal conversations, private settings, and professional advice puts counselors at risk, as evidenced by a 2019 report indicating the average cost of a counselor professional claim with a payment to the injured party is $113,642.
Therapists who are employees are typically covered by the business’ errors and omissions insurance, but this is another situation where they may want their own coverage. The same report shows claims for counselors insured through a private practice averaged $92,218. Students working through their clinic experience may also need errors and omissions insurance.
Accountants Need Errors & Omissions Insurance
Like all of the professions on this list, accountants risk being sued because they are obligated to take reasonable care when working with clients. That standard is reinforced by a number of organizations, like the Financial Accounting Standards Board that established the generally accepted accounting principles (GAAP), as well as federal regulations, depending on their clientele.
However, perhaps the No. 1 reason why accountants need professional liability insurance is that they deal with clients’ finances. Clients often look for someone to blame when things go wrong, and the person in charge of the money is usually a good target. E&O insurance protects accountants in this situation, even when the accusations are without merit.
Consultants Need Errors & Omissions Insurance
While consultants don’t face as great a risk as other professions on this list, they aren’t immune to professional negligence claims. However, consultants don’t have the strict standards that physicians, lawyers, and others have, so consultants aren’t sued as often.
Your degree of risk, and therefore the cost of your consultant professional liability insurance, is greatly impacted by the type of consulting you perform. For instance, consultants who provide financial advice, such as investment consultants, often pay more for their coverage.
Contractors Need Errors & Omissions Insurance
Allegations of professional errors actually fall into a coverage gap in general liability insurance that leaves construction businesses and contractors exposed to lawsuits. Standard general liability excludes coverage for damage to the policyholder’s work or work product. As a result, a contractor’s policy may pay for injuries her work causes others, but not the repairs to make things right.
For example, let’s say a carpenter uses shoddy screws to build a staircase, which collapses while the homeowner is standing on it. The carpenter’s general liability most likely pays for the homeowner’s injury, but rebuilding the staircase comes out of the carpenter’s pocket. However, contractors E&O covers claims alleging faulty workmanship, errors or omissions in designs, and the use of poor materials.
Additionally, insurers usually make a distinction between contractors errors and omissions and professional liability insurance. The latter is typically reserved for businesses with design-build operations because it covers errors in design and advice.
3 Reasons You Need Errors & Omissions Insurance
Whether you call it E&O, professional liability, or malpractice insurance, a policy that covers negligence claims can be a major benefit to your business. Not only does coverage protect your assets, it can also make you more attractive to clients.
1. You Want to Protect Your Assets
Perhaps the most important benefit of errors and omissions insurance is that it protects your assets. Even settling a lawsuit out of court may require a lawyer’s assistance, and attorneys’ fees are typically around $100 to $1,000 per hour.
Should you end up in court, you have to cover other costs, such as:
- Court fees: Every motion filed with the court costs money, plus you may have to pay for legally acceptable copies of your documents as well as fees for the clerk and marshal
- Discovery costs: Before you go to court, lawyers on both sides take depositions from expert witnesses; typically, this includes paying fees for court reporters, transcriptionists, and videographers
- Expert witnesses: Defending malpractice cases often requires expert testimony to establish the standard of care; the cost here ranges from $1,000 to $5,000
Business owners who are sole proprietors (i.e., those who haven’t formally filed a business entity) should pay special attention to these costs. As a sole proprietor, you’re personally responsible for your business’ debts—including judgments made against it. Say, for example, your business is sued for negligence, and the plaintiff is awarded $10,000. If your business doesn’t have the resources to pay, then you may have to dig into your personal assets, including your home or retirement funds.
2. You Are Required to Carry Errors & Omissions
Few professionals, mainly physicians and lawyers, are required to carry malpractice insurance, and they only have mandates in certain states. However, there are other situations that require professional liability coverage. One is when you work on a government project. Under the Federal Acquisition Regulations, contractors are required to have a variety of policies depending on their work.
3. You Want to Land More Clients
Professional liability insurance can lead to more, and sometimes larger, clients. At the very least, having E&O coverage indicates that you’re not running some fly-by-night operation. That can be attractive to the businesses you hope to contract with. Moreover, large corporations usually prefer to work with businesses that carry liability insurance because it acts as a layer of protection for the corporation, too. If something goes awry and someone sues the business, the corporation knows the business owner has the financial means to handle the situation.
Professional Liability Insurance Requirements Frequently Asked Questions (FAQs)
Understanding your industry’s common professional liability exposures is vital to protecting your business. Below, we answer some of the most frequently asked questions about professional liability requirements.
Who needs errors and omissions insurance?
Whether or not you need E&O insurance depends mainly on your profession and location. State law sometimes requires doctors and lawyers to carry industry-specific malpractice coverage, but few other industries have similar mandates. That said, business owners you work with may require errors and omissions insurance, so it’s a good idea to check your contracts.
How much professional liability insurance do I need?
Perhaps the most important factor for deciding how much professional liability coverage you need is your likelihood of being sued. Certain industries, like medicine and law, as well as disciplines within an industry see more malpractice claims than others. Once you have a sense of your risk, you can select your coverage amounts. Policies are typically sold in increments of $1 million, but some carriers offer coverage limits as low as $500,000.
How much does it cost for errors and omissions insurance?
For most small business owners, professional liability insurance costs between $500 and $3,500 per year. However, premiums vary greatly depending on industry and discipline. Medical professionals, for example, often pay $4,000 per year but can pay as much as $136,000 if they’re in a high-risk specialty like surgery. Other factors include business size, location, and coverage amount.
Even when it’s not required by law, professional liability insurance is an essential policy for anyone whose specialized training or expertise is at the heart of their business operations. As an expert who provides services or advice, you open yourself up to the costly allegations of professional negligence errors and omissions policies typically cover. While policies were traditionally reserved for physicians, lawyers, engineers, and architects, more insurers are offering coverage for other professionals and tradespeople.