Professional responsibility

Professional Liability Insurance

Professional liability, errors and omissions (E&O), and negligence all fall under one category of coverage designed to protect the insured from claims that may arise from providing professional advice or services to clients. In this video, I’ll explain in detail what professional liability insurance (E&O) is and when you, as a professional, may need it.

So, what is professional liability or E&O insurance?

The first step is to define what a professional is in the context of the law and in relation to insurance. A professional is any individual or firm providing advice or services that require special knowledge or skills that the general public may not possess. Typically, these services require some form of licensing or specialized training and education.

When considering this statement, you can think of professionals such as lawyers, accountants, real estate brokers, insurance brokers, consultants, financial advisors, stockbrokers, engineers, designers, and architects. A completely different area of professional services includes personal services such as hairdressers, cosmetologists, massage therapists, personal or life coaches, and so on. You might now ask why I didn’t mention doctors, dentists, surgeons, and other medical professionals. This is because medical malpractice and related fields are somewhat different. It is called med mal (medical malpractice insurance).
There are also E&O policy forms for tech companies that cover claims arising from errors and omissions in tech products and services.

Another important point is the difference between general liability and professional liability, and why you may need both types of policies.
General liability covers claims arising from bodily injury, property damage, and personal injury, which can include things like advertising liability, injuries, defamation, etc. Professional liability, on the other hand, strictly excludes claims for bodily injury and property damage. There are some overlapping gray areas—such as personal injury issues—but this varies from policy to policy and is somewhat complex.

The key aspect of professional liability insurance is that it covers claims arising from providing professional services, advice, or guidance that result in financial losses for the client. The bottom line is that most professional service companies will need both forms of insurance because they cover two different types of claims. Take, for example, a consultant. This could be any consulting firm providing professional advice to its clients. They have an office, and a client visiting the office slips on a wet floor and is injured. The client sues the consultant for their injuries, pain, and suffering for a million dollars. In this case, the general liability policy would respond to this claim. A similar claim can happen even if the consultant doesn’t have an office and only works remotely or occasionally visits clients.

The second type of claim for a consultant could be the following: a management or business consultant advises a client to make certain changes to their business to increase profitability, which the client implements. A year later, the client’s business is in a worse financial position, and they end up filing for bankruptcy. The client sues the consultant for poor advice that led to bankruptcy and financial losses. In the second case, there were no bodily injury or property damage claims. The claim focuses on poor advice that caused the client to incur financial losses. So, this is E&O insurance.

When do you need professional liability or E&O insurance?

1. Your clients may require you to purchase E&O or professional liability insurance when entering into a contract. In fact, many new clients come to us for E&O coverage when they secure their first major contract, and the client demands that they have professional liability or E&O insurance. The client may have never considered this insurance before but now needs it to meet the contract requirements. And, of course, it’s important to have it for potential claims that may arise from this and other interactions.

2. You need professional liability or E&O insurance if your business falls into the category of providing professional services. This is because your business owner’s liability or general liability insurance won’t cover claims arising from errors and omissions you make when providing services to your clients. This is covered by a professional liability policy.

The first and most important part of professional liability insurance is the defense costs. I’ve had clients tell me they will never be sued for professional liability, and even if they were, the claim would never succeed. I don’t entirely agree with this statement, but this is where defense comes into play. Many E&O claims may eventually be dismissed, but getting that dismissal will cost a lot in attorney fees and other expenses, which are covered by your E&O policy. Usually, there is a deductible or retention that you pay out of pocket before the insurance company starts paying for defense costs, but after that, the insurance company covers all expenses.
Secondly, there are settlement costs—the amounts you must pay to settle claims. These amounts can be significant, so purchasing sufficient coverage is important. It’s also worth mentioning that most E&O policies are written on a claims-made basis, and the key provision in most claims-made forms is that defense costs are part of your liability limit. This means they reduce the available coverage limit under your policy. For example, if you had a $1 million limit on your E&O insurance, and defense costs amounted to $500,000, you would only have $500,000 left to settle the claim. So, purchasing high defense limits is crucial.

Today, there are many different types of professionals, advisors, and consultants who need E&O insurance or professional liability. Many traditional professional categories have their own specialized forms of coverage, such as a lawyer’s professional liability policy or an E&O policy for a real estate broker.
But what about all the unique consultants and other professional service providers? This is where it gets more complicated, and a unique approach is required in the insurance business, which we call MPL or miscellaneous professional liability. The biggest challenge is defining professional services accurately to ensure all potential claims are covered.

Sometimes it’s necessary for the broker and underwriter to negotiate to define professional services broadly enough to cover the types of claims that may arise in the insured profession.

In conclusion: The various types of professionals, advisors, and consultants who need E&O insurance or professional liability are quite diverse. Many traditional professional categories have their own specific forms of coverage, and a broad category of consultants and advisors may fall under different forms of professional liability. Regardless of what type of profession or policy you need, the key to getting the right protection is working with an experienced insurance broker who understands the nuances of different policies and has extensive market knowledge. Such a specialist will help you find the right protection tailored to your needs at a competitive price.

What happens if you make a mistake that harms a client?
The advice you offer may unintentionally cause harm to your client.

What is professional liability insurance?

Professional liability insurance (E&O Insurance) is critically important for professionals providing expert services. It protects against financial consequences if errors, omissions, or negligence lead to client losses. This insurance covers not only legal expenses but also compensation if your client decides to file a lawsuit against you.

Who needs professional liability insurance?

Almost any company or professional providing consulting or professional services may face risks covered by E&O. This is particularly important for:

– Lawyers. Protection from claims related to incorrect advice or unfavorable court decisions.

– Consultants and accountants: Coverage for risks related to incorrect recommendations or calculations.

– Architects and engineers: Design errors can lead to costly corrections and lawsuits.

Main risks and coverages

– Errors and omissions. Protection from claims arising from human mistakes.

– Negligence. If a client proves that your actions or inactions caused them financial losses.

– Legal expenses. Coverage for attorney fees and court costs.

– Claim settlements: Payments required to settle a claim.

Why is it important to have E&O insurance?

Even the most experienced professionals can make mistakes, and a single lawsuit can destroy your business. E&O insurance not only helps cover financial losses but also protects your reputation. Without this coverage, a company or professional could face significant losses that may be hard to recover from.

Conclusion

Professional liability insurance is a necessary protection for any professional providing services. It helps safeguard your finances and reputation, allowing you to focus on delivering quality services without fear of potential lawsuits.