Professional Liability Coverage
Professional liability coverage protects you if you're sued for the work or advice provided by your business. You may also hear this coverage referred to as errors and omissions insurance or malpractice insurance. In more legalistic terminology, professional liability insurance covers you for things like breach of duty, negligence, misstatement, omissions, and wrongful acts.
If you hold yourself out as an expert in your field (or if you can legally be considered an expert), professional liability coverage should be a part of your business insurance plan, just like property insurance or workers' compensation. Professionals in the following fields should seriously examine their need for this coverage: accounting, health care, legal, architecture, engineering, software, and service businesses (e.g., travel agents or consulting firms).
Why is professional liability coverage necessary?
Our society is quick to sue and litigate, and liability claims aren't cheap to defend or settle. In such a climate, professional liability coverage is necessary to protect you and your business if you're sued and found liable. In fact, depending on your trade, your state or local government may require you to carry professional liability coverage (e.g., most states require medical doctors to have malpractice coverage). Similarly, government agencies or private companies may require you to have this coverage before they award key contracts.
As a business owner, you may want to require your subcontractors to carry their own professional liability coverage. This is a growing trend in the private technology sector. In other trades, like construction, it's common practice for general contractors to require subcontractors to carry their own liability insurance.
The cost of defending your business in a lawsuit is another reason to carry this coverage. Whether a claim is valid or not, you'll still incur the legal expenses of defending yourself. And if a claim is valid, you'll have the additional expense of paying the claim. If your business doesn't have the deep pockets to handle these potentially large expenses, professional liability coverage can serve as a cost-effective resource.
What types of coverage are available?
Two main types of professional liability coverage are available: occurrence coverage and claims-made coverage. With occurrence coverage, you're covered for any incident that occurs while your policy is in force, regardless of when a claim is filed. So if a claim is filed this year for work you did 10 years ago while you were insured, you're still covered, even if you're no longer in the business. As you might expect, occurrence coverage is not cheap. Also, you should realize that the policy limits in force at the time you bought the policy will still apply today. So while $100,000 of coverage might have seemed more than enough 20 years ago, that same amount of money may be totally inadequate today.
The other main type of coverage is claims-made coverage. With this type of coverage, you're covered for any claim that is made during the term of the policy. In other words, if a claim is made after the policy expires, there's no coverage--even if the claim resulted from an event that took place while the policy was in force. The advantage of a claims-made policy is that the premium is usually discounted in the early years. So, it can be a good choice for a start-up business trying to hold down expenses. But over time, the premium will increase to more accurately reflect the real costs of insuring your business, usually around the fifth year of the policy.
Because it's hard to know whether a claim will be filed in the future (after your policy expires), insurers offer two types of supplemental insurance that fill the gaps of claims-made coverage. The first type is tail coverage, which covers any incidents that occur while the original claims-made policy is in force but are not reported until after the claims-made policy expires. This coverage is often used when a professional changes insurance carriers, goes part-time, becomes disabled, enters retirement, or dies. Some claims-made policies offer guaranteed tail coverage as an option.
The second type of supplemental insurance to claims-made coverage is nose coverage, which is prior-acts coverage that works like tail coverage. Whereas professionals may use tail coverage when they're winding down a business, they can use nose coverage when they want to continue in business but change their insurance carrier or employer. For instance, a dentist in one practice who wants to join another practice would use nose coverage to provide continued liability protection in the event he or she were sued because of an event that happened in the previous job.
What should you look for in a professional liability policy?
There are two significant expenses in any liability claim: the cost of defending yourself and the cost of any claim awarded to the person or business suing you. So, a key factor to consider in any policy is the size of your claim limit. Claim amounts vary from industry to industry, and there's no rule of thumb for all businesses. But by talking to a few peers in your trade who've been around for a while, you can get a good idea of typical claim amounts. An insurance agent who specializes in professional liability insurance can also be a good source of information about claims experience in your industry.
When you're examining claim limits, note how defense costs are handled. Some policies subtract defense costs from your overall claim limit, which lowers the amount left over to pay claims. Other polices pay for defense costs in addition to a claims limit, which leaves all of your coverage available to pay claims.
You'll also want to examine the specific provisions relating to your legal defense. Some policies include a "duty to defend" clause, which means that the insurance company will pay to handle your case in all situations. Other policies have an "option to defend" clause, which means that the insurance company will decide whether to provide a legal defense for you. Policies also vary in how your defense may be handled. Some policies may let you choose your attorneys; others leave it to the insurer. And some policies may ask for your input regarding settlements, while others leave this decision solely to the insurance company.
Another factor to consider is loss of earnings. If you have to spend time in court as part of your defense against a claim, you're probably not generating income. That lost time means lost revenue. Some policies will pay for your time in court, while others won't.
Where can you get coverage?
Probably the best place to begin researching professional liability coverage is with your association or trade group. Association members have experience in this area and will know the best insurance carriers for your industry. As a member of the association or trade group, you may qualify for coverage at a favorable cost. And you should also talk with the insurance agent who handles your other business insurance coverage.