What is Professional Liability Insurance for Small Business?

What would happen if you made a mistake that unintentionally harmed a client? Professional Liability (PL) insurance (also known as Errors & Omissions or E&O insurance) helps protect your small business from failure to uphold contractual promises in mostly service-based professions.

What does this actually mean for a small business like yours?

You may be more familiar with the terms “errors and omissions insurance” or “medical malpractice insurance,” both of which are used interchangeably with PL insurance.

Professional Liability insurance pays for financial or economic damages to your customers or clients as a result of:

  • Negligence,
  • Malpractice,
  • Errors,
  • Misrepresentation,
  • Incomplete or inaccurate work, and
  • Breaches of contract.

In the event you receive a lawsuit for damages, PL insurance would pay for your legal defense and any damages awarded to the other party.

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Professional Liability Explainer Video

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Is Professional Liability the right coverage for you?
Find out in this overview video!

Securing small businesses with Professional Liability Insurance

Don’t think you need Professional Liability insurance?

Consider a situation in which, during the normal course of running your small business, you make a mistake that impacts a client. You’d be held responsible for legal fees and damages unless you’re protected by errors and omissions insurance.

Similarly, if you’re working with a client who depends on you to fulfill a service by a concrete deadline and you miss the deadline, causing a negative impact to your client, your client can file suit against you.

Professional Liability insurance would cover your legal fees and any damages you owe, preventing you from going out of business. 

This type of insurance is critical for any small business that provides services or works on a contractual basis.

To err is human. Even professionals with the best intentions can slip up, have a lapse in judgment, or simply forget something.

How does Professional Liability Insurance work?

Where General Liability and Business Owners Policies protect against physical risks, Professional Liability insurance for small businesses covers liabilities arising from errors, omissions, and other wrongful acts as a result of your profession.

Professional Liability insurance is especially necessary for small businesses that:

  • Produce specific work on behalf of someone else
  • Generate reports, make recommendations, or provide opinions
  • Require some degree of skill, a license, or training to operate

Professional Liability insurance protects you from wrongful acts and economic damages not covered by GL insurance or a BOP, such as a failure to:

  • Adhere to a contract or agreement
  • Deliver a final product or service in a timely fashion
  • Provide accurate or correct advice, product, or service

Depending on the industry, Professional Liability insurance may also be referred to as errors and omissions insurance, owing to its nature of protection against claims of mistakes, negligence, and oversights.

Small business insurance without the hassle.

Spending time answering question after question about your business just to obtain the insurance you need is simply a waste of time. That’s why we’ve made this process both seamless and stress free. Coterie offers Professional Liability insurance policies for small businesses that can be purchased on a monthly, or annual basis.

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Common Questions about Professional Liability Insurance

Whether you’re a home-based business owner, run a micro small business, work as a contractor, own a startup, or fall into the many other types of small businesses, you have probably experienced first-hand the frustration of trying to find affordable coverage without having to jump through hoops. Check out these common questions that small businesses ask when it comes to Professional Liability insurance.

Do I need Professional Liability insurance?

Most companies today utilize technology in some part of providing a service or product and need to take necessary precautions. To ensure your company is properly insured, you should conduct a full risk-management assessment. No one is more skilled at helping you identify and manage your risk exposures than a licensed independent insurance agent. If you don’t already have one, find an agent near you today.

What does Professional Liability / E&O insurance cover?

E&O manages risks resulting from providing a product or service to a third party, which are not covered by a GL policy. Specifically, E&O protects your business in the event a third party suffers a financial loss due to your product or service not performing as it was intended or expected; this includes the event of an error or omission committed by your company. These policies also cover defense costs in the event of litigation. E&O coverage would apply in the following situations: 

  • A mistake was made and an error in the code of a website or program your company produced isn’t found before it is implemented. A third party depends on this product or service to operate its business and its operations are stalled due to the error, causing them a financial loss. 
  • A part your company produces is installed in a piece of equipment. After a short amount of time, the component stops working, causing the equipment to fail, but otherwise not damaging anything or hurting anyone. The third party that relies on this equipment for its business has to stop operations and suffers a financial loss. 
  • One of your employees recommends that a client adjust its network. The client follows the advice and its network crashes as a result, causing a time and financial loss for its operations.

In all of these cases, GL coverage would not cover a claim or any litigation costs because of the presence of an error and the lack of resulting physical damage to the third party’s property. It should be noted that E&O policies usually exclude product recall, but some will accept damages for loss of use of a failed product.

Do I need both General Liability and Professional Liability Insurance?

Depending on your industry and level of licensing, credentialing, or training, you very well may need both types. The main difference between GL and PL is the risk exposure they cover for different types of lawsuits or allegations. If you work in a position where you’re exposed to more risks resulting from the quality of your advice, errors, or malpractice of your profession, consider Professional Liability insurance.

Who should carry Professional Liability insurance?

Small businesses who have special licensing, training, or credentials, and are worried about legal costs stemming from lawsuits regarding potential errors or omissions should consider Professional Liability insurance. Examples of professions include accountants, engineers, licensed beauticians, business consultants, and trainers.  Some clients may specifically require you to provide a certificate of insurance to prove you carry this type of coverage.

Is Professional Liability insurance required by law?

Regulations and laws vary by state so be sure to check your state’s guidelines.

What exactly does my business need in terms of Professional Liability insurance?

When buying professional liability coverage, there are considerations that will help you determine exactly what you need:

  • Is the insuring agreement broad enough to capture all of the current and future work of the policyholder? Determine if the policy covers the scope of your organization’s professional tasks and services by reading the definition of the covered services in the policy. For example, in a medical professional’s professional liability coverage, the operative definition would be “medical services” or a comparable phrase. Coterie can help you determine if all professional tasks would be covered under the operative definition or if additional clauses would need to be added.
  • What if there is a sale, merger or change in position at your organization? Discuss what these possible changes in services mean for your coverage. Is there approval needed to continue coverage?
  • Are there any exclusions? Look at the list of exclusions that resist coverage. Review the list to make sure it does not preclude coverage for any professional services or tasks that you need covered.
  • Is an extended reporting period an option under the policy? These provisions offer extensions of time to report claims that would otherwise fall outside the policy period—as long as the act/omission resulting in the claim occurred during the policy period. Find out what extended reporting period options are available and discuss how much time the policyholder may need to report a claim.
  • Can the policy be customized or modified? Can extensions be added? Common additional coverage includes disciplinary proceedings or reduced retentions and may be of importance to your business.
  • Have there been any past tasks or activities at your business that could potentially result in a claim? Have there been past instances where a claim was filed? What was the result? Discussing the specifics of these with Coterie can help determine what coverage specifications you need now, to prepare you for the future.

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