PROFESSIONAL LIABILITY INSURANCE

While your commercial general liability insurance protects your business if your work causes property damage or bodily injury, it does not provide protection for any economic losses your clients may experience due to mistakes or negligence in your work.

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PROFESSIONAL LIABILITY INSURANCE

professional liability insuranceWhat is Professional Liability Insurance

Professional liability insurance (PLI), also called errors & omissions (E&O), is a form of liability insurance which helps protect professional advice- and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit. The coverage focuses on alleged failure to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the policyholder. These are causes for legal action that would not be covered by a more general liability insurance policy which addresses more direct forms of harm. Professional liability insurance may take on different forms and names depending on the profession, especially medical and legal, and is sometimes required under contract by other businesses that are the beneficiaries of the advice or service.

Coverage sometimes provides for the defense costs, including when legal action turns out to be groundless. Coverage does not include criminal prosecution, nor a wide range of potential liabilities under civil law that are not enumerated in the policy, but which may be subject to other forms of insurance. Professional liability insurance is required by law in some areas for certain kinds of professional practice.

What does Professional Liability Insurance cover?

While your commercial general liability insurance protects your business if your work causes property damage or bodily injury, it does not provide protection for any economic losses your clients may experience due to mistakes in your work. Your clients could still sue you for their economic or financial losses, which is where professional liability insurance steps in.

Professional Liability Insurance provides protection against lawsuits arising from:

Work errors or mistakes

  • Example: Your contracting firm designs and builds a skylight for a commercial building. The finished skylight doesn’t let in an adequate amount of light due to a design flaw, so you have to delay the opening of the building to redesign and rebuild it.

Failure to do what was promised

  • Example: You sign a contract guaranteeing a client their building will have an exterior with a very specific type of marble, but are unable to obtain the material due to its scarcity.

Undelivered or uncompleted work

  • Example: You are hired to construct a bridge, but fail to complete the job.

Actual or alleged negligence

  • Example: Your contracting firm is hired to renovate an office by a certain date. Due to poor planning, your workers fail to meet several deadlines and fail to deliver the project on time.

Misrepresentation

  • Example: You grossly exaggerate your ability to adequately complete a job to repave a highway and fail to meet your client’s requirements.

Violation of good faith and fair dealing

  • Example: Your contracting firm is hired to renovate a shopping mall. You hire a sub-par subcontractor to work on the building because the subcontractor is your cousin, but you tell the property owner that you have hired a subcontractor that is known to be one of the most reputable firms in the city.

Inaccurate advice

  • Example: You tell your client that they need to purchase a special kind of insulation for their construction project which will dampen noise from the city. It turns out that the insulation is entirely ineffective.

With Professional Liability Insurance, you’ll be covered for any judgments against your business for these types of lawsuits, as well as the costs for legal defense against these claims. This insurance covers you, your business, your employees, and independent contractors while they are working for your business.

errors-and-omissions

What does Professional Liability Insurance not cover?

Professional Liability Insurance covers your business if a dissatisfied client sues you for professional errors or negligence. It does not protect you from the following scenarios:

  • Liabilities covered under the commercial general liability policy
  • Property damage
  • Bodily injury
  • Personal and advertising injury
  • Intentional acts
    • Example: You intentionally design a plumbing system for a residential housing project that is not up to code, in order to save on costs. If your client sues for economic losses, your Professional Liability Insurance will not cover the damages if the court finds that you intentionally designed a substandard system for your own profit.
  • Illegal acts
    • Example: Your company has been contracted to demolish a building which contains asbestos. There are extensive government regulations involving the disposal of this material. You proceed to violate these regulations and dump everything into a nearby lake. The city discovers the asbestos in the lake and fines your client $50,000. If your client sues for economic losses, you will not be covered by your insurance because you have broken the law.

Why Do I Need Professional Liability Insurance

The primary reason for professional liability coverage is that a typical general liability insurance policy will respond only to a bodily injury, property damage, personal injury or advertising injury claim. Other forms of insurance cover employerspublic and product liability. But various professional services and products can give rise to legal claims without causing any of the specific types of harm covered by such policies. Common claims that professional liability insurance covers are negligencemisrepresentation, violation of good faith and fair dealing, and inaccurate advice. Examples:

  • If a software product fails to perform properly, it may not cause physical, personal, or advertising damages, therefore the general liability policy would not be triggered; it may, however, directly cause financial losses which could potentially be attributed to the software developer’s misrepresentation of the product capabilities.
  • If a custom-designed product fails without causing damage to person or property other than to the subject product itself, a product liability policy may cover consequential damages such as losses from business interruption, but will generally not cover the cost to redesign, repair or replace the failed product itself. Claims for these losses against the manufacturer may be covered by a professional liability policy.

What are the limits for Professional Liability Insurance?

There are two limits that come with Professional Liability Insurance: occurrence and aggregate. The occurrence limit is the maximum amount the insurer will pay for any one claim made during the life of the policy. The aggregate limit is the maximum amount the insurer will pay in claims for the lifetime of the policy (usually one year). Limits are presented as occurrence/aggregate. For example, a $2M/5M policy will pay up to $2 million for any one claim made during that period and up to $5 million for all claims during the policy’s lifetime.

Policy limits play a large role in the overall cost of Professional Liability Insurance. You may choose a limit based on your risk exposure, or you might opt for coverage with higher limits because of contractual obligations to your client.

How much does Professional Liability Insurance cost?

The cost of Professional Liability Insurance depends on a number of factors, including the type of business you run, your industry, coverage limits, location, and number of employees. While the range of pricing can vary widely, most small business owners can expect to pay annual premiums between $400 and $1,000.

How much Professional Liability Insurance do I need?

For most small businesses, a $1 million per occurrence and $1 million aggregate limit in Professional Liability Insurance is appropriate, but this is highly dependent upon your industry and the risks your business faces.

Regulating Agency and References

Insurance Information Institute (III)

This organization’s mission is to improve public understanding of insurance – what it is and how it works. Visit III at https://www.iii.org.

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