Professional liability insurance is the one form of business insurance that most professional service providers agree is non-negotiable. While they may waver over whether or not to get insurance for their business property, autos, or even for their personal lives, most professional service providers agree that professional liability insurance is a necessary cost of doing business. While many ask why this is so, others know the value of it, especially if they have been in litigious situations in the past. The unfortunate reality is that our society is becoming more litigious by the day as opposed to less so.
For those who work within a professional capacity such as a real estate agent or even an IT consultant, the chances of being sued for negligence, or even perceived negligence, are higher than ever before. While many people will trust that such an individual has done their job to the best of their ability, others may be upset if the professional could not get them the desired result. For example, if a real estate agent were to lose a sale for a client to another buyer, the client would be understandably upset and might even refuse to pay the agent’s fees. This is obviously untoward, since the agent has still done his or her job.
The client in this case could then take the real estate agent to court for misconduct, claiming that they had not done everything in their professional capacity to serve their clients’ best interests. This is where professional liability insurance comes in. The real estate agent would not have to pay their own legal fees and risk the possibility of bankruptcy. Instead, their insurance would cover the legal expenses and any resulting settlements.
Professional liability insurance is more than just a contract requirement or nuisance expense. It is a safety net that professionals may call upon unexpectedly; a financial backstop in case something goes wrong. While paying an insurance premium every month may be irritating and even feel unnecessary, experienced service professionals will tell you that sooner or later, this investment could produce your greatest returns.
Professional liability insurance, which is also referred to as E&O insurance, is designed to protect businesses against lawsuits or claims related to misrepresentation, errors, negligence, and documentation issues.
Depending on what industry you work in, you may be legally or ethically required to have professional liability insurance in place before you commence work on any contracts.
Do some clients require you to carry Professional Liability insurance coverage?
Yes. It is very common for clients to request the professionals and businesses they work with to have full professional liability insurance in place. In fact, some clients will not sign a legally binding contract until proof of professional liability insurance has been provided. For instance, you may be requested to provide documented evidence of a certificate of liability insurance (COI) to confirm you have the appropriate insurance in place and verify the level of your coverage.
Clients seek clarification of your coverage so they can operate with full confidence that any losses or liabilities that emerge will be insured in the event that things do not quite go according to plan. For instance, let’s say you are collaborating with a designer to deliver a project for a shared client and the designer misreads your renderings and places an expensive order for materials that cannot be used in the planned construction. The shared client has the potential to start legal action against both you and the designer, requesting that you fully reimburse the costs of the materials that could not be used. If you have professional liability insurance in place, you can rest easy that the costs associated with enlisting the services of an attorney to represent you in court, and the resulting settlements, will be covered.
Another reason why a client may request proof of your professional liability insurance is because they want assurance they won’t be held responsible for any damages that arise from substandard work. For instance, let’s say you produce a design that contains an undetected flaw, leading to a situation in which the constructor has to stop the build part way through the project, tear down the work that has been performed, and commence all over again. In such a scenario, your client may sue you for the cost of labor and materials. If you have professional liability insurance in place, you will be covered for the costs of this exercise up to the limits of liability.
Which business should consider carrying professional liability coverage?
Any business or individual that provides professional services should seriously consider getting personal liability insurance. Just some of the professionals who may need this coverage are as follows:
- Accountants and auditors
- Insurance professionals
- Real estate agents, etc.
All of these professions have something in common: They provide a service or advice to clients that has the potential to do harm if not executed correctly. For instance, let’s say a contractor advises that a certain type of building material is used to construct a new building. However, if those materials later transpire to be unfit for use in public buildings, the contractor’s client will have a legal case against it and can sue for damages.
This is where professional liability insurance is important. This insurance will protect the contractor against any settlements that emerge following a legal case. Even if the contractor does come out on top of a lawsuit, securing legal representation in court is a very expensive business. Professional liability insurance will cover any legal fees and the cost of representation.
In many cases, your client may request you provide evidence that you have professional liability coverage in place before they agree to enter into a contract with you because they are seeking assurance that they will be protected if the terms of the contract are broken, or you fail to deliver on your promises.
Should you be asked to provide evidence of professional liability insurance, you will need to give the client a copy of your certificate of insurance.
Regardless of how careful or experienced you are, mistakes are possible and are sadly all too common. Mistakes can occur due to miscommunications, miscalculations, and failure to fully follow all protocols. Think of professional liability insurance as an absolute must if you want to protect yourself again expensive legal cases and costly claims.
How does professional liability insurance protect different types of businesses?
Professional liability insurance is designed to protect businesses and professionals against the costs associated with lawsuits due to negligence or error; for instance, attorney fees and settlements arising from judgements that are not in your favor.
The factors that lead to client lawsuits can differ from business to business. In addition, if you are a business owner, it is not just your own actions you will be accountable for; you may also be sued on the back of the errors or oversights of your employees.
Here is a list of some of the professions that can benefit from professional liability insurance and the types of cases that may emerge:
Consultants are frequently recruited to develop strategies on behalf of clients that are designed to address a specific problem or formulate projections and predictions based on a set of data. In the event that a consultant makes a miscalculation or offers inaccurate advice that leads to the client facing financial loss, the client may choose to sue the consultant for damages/compensation. Professional liability insurance will cover the consultant for the cost of legal proceedings and settlements.
Accountants deal with vast amounts of numbers and data, and the work of an accountant is particularly prone to human error or miscalculations.
If you make a basic error when compiling a client’s accounts—for instance, inaccurate data entry or inaccurate reporting—having professional liability insurance in place will cover you for costs associated with that error.
Architects deal with many minor details as they develop building designs that need to be fully compliant with construction standards and local regulations. Even the smallest error can have fundamental repercussions. As such, it is imperative that accountants have professional liability insurance in place to fund legal defense and settlement costs that arise should matters not quite go according to plan.
Engineering liabilities can arise from a myriad of factors, including delivery delays, missed deadlines, and budget issues, and this leads to a significant risk of accusations of negligence. For instance, if an engineer fails to meet a major milestone, the client may sue for negligence. In such a scenario, the engineer would benefit from having full professional liability insurance in place to protect their assets.
Regardless of what service you provide, you always operate with the underlying risk that clients may not be satisfied or errors may be made. When weighed up against the potential costs, professional liability coverage is an affordable way to cover yourself against the high costs of litigation and settlement. In some cases, it may be all that stands between your survival and the failure of your business.
*As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. The information contained on this web page is general only and should not be relied upon as advice.