For small businesses, the risk of legal action is a reality that can significantly impact operations. In fact, small businesses that generate over a million dollars annually spend an average of $20,000 on frivolous lawsuits, and about 50% of civil lawsuits target small businesses each year. For some businesses, a single lawsuit could threaten their survival.
To protect against these risks, small business owners often turn to professional liability insurance (PLI), which can provide peace of mind in the event of legal claims.
What is Professional Liability Insurance?
Professional liability insurance, also known as errors and omissions (E&O) insurance, is designed to protect businesses against lawsuits claiming mistakes, omissions, or failures in service. It covers the costs associated with defending against legal claims, including settlement fees and judgments.
If your business makes a mistake that causes financial harm to a client, they may file a lawsuit to recover damages. PLI helps cover the legal expenses related to these types of claims.
What Does Professional Liability Insurance Cover?
Professional liability insurance typically covers the following:
- Mistakes or oversights in the services you provide.
- Failure to deliver services as agreed.
- Lawsuits over missed deadlines that impact the client financially.
- Negligence claims, where you may have failed to uphold professional standards.
- Breach of contract claims.
- Misrepresentation, where your business has been accused of providing false information or failing to meet promises.
What Does Professional Liability Insurance Exclude?
While professional liability insurance provides essential coverage, it does have exclusions. For situations outside its scope, other types of insurance would be needed. Exclusions include:
- Bodily injury: If your services cause physical harm to a client, product liability or general liability insurance would be more appropriate.
- Property damage: Damage to property such as buildings or machinery is typically covered under property insurance.
- Intentional wrongdoing: If you deliberately provide poor service or act maliciously, your PLI will not cover the legal costs.
- False advertising: Misrepresenting your qualifications or certifications to clients will not be covered under PLI.
- Illegal activities: If your actions break the law and result in a lawsuit, PLI won’t offer protection.
Which Small Businesses Need Professional Liability Insurance?
While every business owner should assess their own risks, some industries are more vulnerable to legal claims. If your work involves providing specialized services or advice, the likelihood of facing a lawsuit is higher. Businesses in these sectors often require professional liability insurance:
- Accountants, Auditors, and Bookkeepers: Errors in managing finances or recordkeeping can lead to costly lawsuits.
- Consultants: Providing advice or projections that don’t meet client expectations can open the door to legal claims.
- Health and Fitness Professionals: Personal trainers or yoga instructors face the risk of injury claims.
- Architects, Engineers, and Designers: Design errors or miscalculations could lead to costly consequences, such as client lawsuits.
- Real Estate Agents and Brokers: Mistakes related to property transactions or failing to disclose issues could result in lawsuits.
- IT Professionals and Software Developers: Flaws in software or systems could cause financial damage or security breaches, making PLI critical.
Even if your business doesn’t fall into these categories, it’s essential to evaluate your risk. If you provide high-value services to clients, professional liability insurance might still be a wise investment.
Who is Covered Under Professional Liability Insurance?
Professional liability insurance typically covers the business and its employees. If you’re a business owner with executives, consider adding a Directors and Officers (D&O) policy for additional protection.
How Much Does Professional Liability Insurance Cost?
The cost of professional liability insurance generally ranges from $550 to $700 annually, or about $46 to $58 per month. However, premiums vary based on factors like industry, business size, and risk exposure. On average, 58% of businesses pay less than $51 a month, with 33% paying between $51 and $100.
While this coverage is relatively affordable, it can provide vital protection against the costs of a lawsuit.
What Affects the Cost of Professional Liability Insurance?
Several factors influence the cost of your professional liability policy, including:
- Industry risk: High-risk industries, like construction, typically pay more.
- Coverage limits: A policy with a higher payout limit will cost more.
- Deductible: Higher deductibles generally result in lower premiums.
- Location: Areas with a high incidence of claims may lead to higher premiums.
- Number of employees: A larger workforce increases risk and premiums.
- Business turnover: High volumes of work increase the likelihood of claims.
- Years in business: Established businesses with a claims-free history are seen as less risky.
- Claims history: Past claims can significantly increase premiums.
What Are Common Professional Liability Insurance Limits and Deductibles?
Most small businesses opt for a policy limit of $1 million, which covers the majority of claims. Deductibles typically range from $2,000 to $5,000, but larger firms might select higher deductibles to reduce their premiums.
When Does Professional Liability Insurance Coverage Begin?
Most professional liability policies are written on a “claims-made” basis, meaning coverage applies only if the policy is active when the incident occurs and when the claim is filed. It’s essential to maintain continuous coverage to ensure you’re protected.
Conclusion
Professional liability insurance is a must for small businesses that provide specialized services. With the potential for costly legal claims, having the right coverage can safeguard your business and provide peace of mind. Consult with an insurance agent to assess your needs and find the best policy for your business.
