UPDATED: Mar 19, 2020
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What Is A Professional Liability Policy?
A professional liability policy is a type of insurance policy which provides coverage if a professional provides a service or advice to a client which the client feels didn’t meet what they were led to expect or if the professional makes a mistake that others in their profession wouldn’t ordinarily make. These are also called errors and omissions (E&O) policies because the professional that is covered by the policy either made a mistake and/or omitted doing something they should have done by the professional standards of their industry. There are two types of professional liability policies. Medical professionals like dentists and physicians carry what is called malpractice insurance. Other types of professionals who give advice and services such as architects, insurance agents, lawyers, engineers or similar professions carry errors & omissions policies. While depending on the profession it might be called one or the other type of professional liability policy, they both essentially cover the same things.
A Look At What Professional Liability Covers
There are two limits on a professional liability policy, occurrence and aggregate. The occurrence limit is the maximum amount of money the policy will pay for any single claim that is filed during the policy's one-year term. The aggregate is how much the policy will pay out in the entire policy term regardless of the number of claims filed during the policy term. So, a policy with $1 million per occurrence and $2 million aggregate will pay no more than $1 million for any single claim and if there are multiple claims filed during the policy period than $2 million is the most the insurance company will pay out.
There are three main types of coverage that are provided under a professional liability policy. The policy covers judgments against the policyholder if they are determined to have committed an error or omission while providing their advice and services to a client. This can include negligence such as giving incorrect advice, has not provided the service at all that they had promised, or made an omission that results in bodily injury or financial loss for the client. Other losses can include personal injury if it’s the result of the professional slandering someone while providing their services or if they are accused of engaging in copyright infringement. If a case does go before a judge, the professional is eligible to be paid an allowance for each day they have to appear in court. The policy will cover the judgment up to the stated amount of liability on the policy.
The professional liability policy also covers the cost of having a legal defense. Even when what on the surface seems to be a simple case can result in thousands of dollars in defense legal fees. While this can have a significant impact on any size of an organization, a small business could be sent into bankruptcy just trying to defend against a lawsuit regardless of the merits of the case which is why having a professional liability policy is so important.
Finally, like many cases in civil court, the majority of lawsuits against a professional end up being settled out of court through negotiations between the involved parties and their attorneys. The policy will provide for the costs of settling the case and the money awarded to the client up to the limit of liability on the policy.
How To Know If You Need Professional Liability Insurance
If a profession involves giving advice to clients or providing a service they are a candidate for getting a professional liability policy. Doctors provide a medical service and if they omit a medical test that they should have performed they could get sued by their patient. An architect could be sued for negligence if one of the buildings they designed collapses due to a mistake they made in designing it. An insurance agent could tell a customer they don’t need Comprehensive coverage on their brand new car and when it’s stolen a week later and there is no coverage the agent would likely be sued by his client.
While medical professionals famously need malpractice insurance, there are a great many of other professions that need professional liability insurance policies as well, some that are surprising. Basically, if you provide advice or a service you have an exposure to errors and omissions. This can include anything from wedding planners to advertising agencies. A wedding planner could be sued for failing to plan a reception, for instance, a mistake that no competent wedding planner would ordinarily make.
Another thing to keep in mind is that a company’s general liability policy excludes the types of coverage that a professional liability policy covers. Just because a professional has general liability does not mean that they are covered if they give bad advice or forget to provide a service that they had signed a contract to do.
The important thing is that not everything that falls under negligence is due to incompetence. Everyone makes a mistake from time to time as it’s human nature. A professional liability policy provides coverage when a professional or their staff makes a mistake, even innocently, that the professional and their company ends up getting sued over.
The Difference Between Occurrence And Claims-Made Coverage
Professional liability policies have two different types of ways they cover claims. The first is occurrence which means the policy will cover any event the professional is sued for that occurs during the time the policy is in force. The claim can be made at any time, even years after the policy has expired or been canceled.
The second way some professional liability policies cover a claim is called claims-made. This type of policy also only covers events that occur while the policy is active but also has the requirement that the claim has to be made while the policy is active in order for there to be coverage. Even if the claim was filed days after the policy went out of force there will not be any coverage provided to defend it. If the professional decides at some point that they want to cancel the policy they might be able to buy what is called tail coverage. If the policyholder can buy it, tail coverage extends the period of time a claim can be made on the policy, although the event causing the claim would still have needed to have happened while the policy was still active
How Much Is A Professional Liability Policy?
Each type of profession has its own risks for the likelihood of a practitioner in it being sued for an error or omission. These differences in risk mean that some professions have much higher premiums on their professional liability policies than other professions do. When applying for a policy, the insurance agent will submit the applicant’s information to an underwriter at the insurance company who will review it. The premium charged depends on the risk that company has assigned to that profession as well as other factors such as the liability limits selected and the number of employees the professional has.
Some medical professionals such as a heart surgeon are going to have higher premiums on their malpractice insurance policy than someone that is a podiatrist, for example, as the fallout of an error or omission is likely higher for the heart surgeon. The hospital or facility they work at could provide this type of policy as part of the overall compensation of the medical professional. Similarly, an architect will likely pay more for an errors and omissions policy than a wedding coordinator because a collapsing building is going to be far more costly to settle than someone forgetting to hire a musician for a wedding reception.
Another factor affecting the cost of a professional liability policy is the professional’s claims history. If a professional has had claims filed against them in the past their rate is going to reflect this history.
Where To Buy A Professional Liability Policy
Most insurance agents are able to sell professional liability policies. If the professional is operating a small business they can likely have their professional liability policy through a general agent that also sells personal and other commercial lines of insurance. If the professional needs malpractice insurance or has a large operation they will likely want to go to an agent and/or insurance company that specializes in these types of policies. Otherwise, most insurance companies such as Allstate, State Farm, Farmers Insurance, and Progressive sell these types of policies which are used by businesses across the United States.
How To Save Money On A Professional Liability Policy
Every company charges different occupations different rates for professional liability policies. Some insurance companies won’t insure some profession at all as it is not part of their risk appetite. For these reasons, it’s important to shop around for a quote on professional liability insurance as it will vary quite a bit depending on the insurance company. Beyond that, a professional taking as much care as possible to not have an error or omission occur for which they could be sued is the best way to keep the cost of this insurance down.