Professional liability insurance, also known as errors and omissions (E&O) insurance, helps to cover your business if a customer claims you messed up, missed something important, or otherwise failed to deliver the service you promised. If a customer believes you’ve made a mistake in your professional services, even if it’s a false allegation, you risk being sued and having to pay legal fees out of pocket without this important coverage.
If your business provides advice, expertise, or specialized services, you should consider professional liability insurance to help protect against potentially expensive lawsuits. Coverage may even be required, depending on your profession, clients, licensing requirements, or state regulations.
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What is professional liability insurance?
Professional liability (or errors and omissions) insurance helps protect businesses that provide professional services or advice when clients claim they made a mistake, acted negligently, or failed to fulfill their professional responsibilities. It can help pay for legal defense costs, settlements, and court judgments, up to your policy limits.
Covered claims may involve negligence, errors and omissions, misrepresentation, missed deadlines, breach of professional duty, and other mistakes that cause a client financial harm. Some policies may also cover claims involving libel, slander, or copyright infringement, though coverage varies by insurer.
How does professional liability insurance work?
When a client or customer requests compensation or sues you for reimbursement for damages due to alleged professional negligence or failure to perform, you can notify your insurance provider and make a claim to cover the costs of various legal fees. Your insurance will only cover you up to your coverage limits and may require a deductible payment—which is subtracted from your claim settlement.
Your professional liability insurance will work on either a claims-made or occurrence policy, which will determine when you’ll need to file a claim with your insurer:
- Claims-made: Covers claims made during the policy period. May cover retroactive claims on or after a specific date. Purchasing “tail coverage” can extend your coverage after your policy expires, generally by an additional 30 to 60 days.
- Occurrence: Covers claims for incidents made during your policy period, regardless of when you make the claim. These types of policies may be more expensive than claims-made policies.
What does professional liability insurance cover?
Professional liability covers various legal costs when sued for alleged failure to meet professional responsibilities, such as errors or omissions. We’ll cover some of the main types of coverage below.
Professional negligence
Professional liability insurance can cover lawsuits over negligence in services that result in a financial loss for your client or customer. For example, if an architect designs structural plans containing a significant error that causes a costly project delay, professional liability insurance may help cover the resulting lawsuit.
Errors and omissions
Your professional liability policy will cover claims where your business makes a professional mistake, even if it was unintentional. For example, if your technology consulting business provides incorrect information involving consumer safety laws or doesn’t mention key details to a client, you could be covered for the resulting damages when they need to rebuild it.
Misrepresentation
Professional liability insurance can cover claims that your business did not accurately describe itself or its services to customers. For example, if a real estate agent sells a house by claiming it could be used as a rental unit in an area where that is prohibited, you could be covered for a resulting lawsuit.
Missed deadlines
Professional liability coverage can cover claims where your customers or clients sue over a financial loss from you missing an agreed-upon deadline. For example, if a graphic designer failed to deliver a time-sensitive commission for their client, they could be covered for a resulting lawsuit or financial damages.
Legal defense costs
Professional liability insurance can help cover your defense costs when sued due to alleged mistakes in your professional services. This can include legal fees such as attorney costs and other court costs, even if you’re found not to have made any professional mistakes.
Settlements
If you’re liable for mistakes or negligence in your professional services or advice, professional liability insurance can help pay for the settlement costs of the damages to your client.
Judgements
If you’re found liable for damages to a client in court due to mistakes or errors in your professional services, professional liability insurance can help cover how much you’re sentenced to repay your client.
Copyright or intellectual property issues
Professional liability coverage may protect your business from lawsuits involving copyright claims. For example, if your graphic design business was alleged to have used an already copyrighted character as a mascot for a business client. However, this coverage can vary between insurance companies and could be excluded.
Breach of professional duty
Professional liability insurance can help cover you for failing to perform services that you’re responsible for doing as part of a contract. For example, if your home inspection business was contracted to review a homeowner’s crawlspace for damage and you failed to complete a required inspection, you could be covered for a lawsuit.
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What isn’t covered by professional liability insurance?
Professional liability insurance covers many claims involving professional mistakes, but every policy is subject to exclusions. Understanding what isn’t covered can help you avoid unexpected coverage gaps and determine whether you need additional business insurance.
Common exclusions can include:
- Incidents involving other professions that aren’t included on your policy
- Intentional acts of professional negligence
- Illegal or criminal acts
- Bodily injury
- Discrimination based on race, nationality, disability, sex, age, sexual preference, or marital status
- Claims where your business had prior knowledge of the incident before purchasing your policy
- Claims involving physical or sexual abuse
- Damages related to pollution or environmental exposures
- Inability or failure to collect or pay money
- Claims related to employment, such as wrongful termination or failure to promote, which is typically covered by employment practices liability insurance (EPLI)
- Copyright infringement (depending on your policy)
Professional liability vs. general liability insurance
Professional liability insurance and general liability insurance protect businesses from very different types of risks. Professional liability insurance covers financial losses resulting from mistakes in your professional services, while general liability insurance covers third-party bodily injury, property damage, and certain advertising-related claims.
Here’s a quick breakdown of the two types of commercial policies:
Who needs professional liability insurance?
Businesses that provide professional services, specialized expertise, or advice should strongly consider professional liability insurance. It’s particularly valuable for businesses whose work could expose them to claims of negligence, errors, omissions, or other mistakes that cause a client financial loss.
Some of these businesses include:
- Accountants
- Advertising and marketing firms
- Attorneys
- Architects
- Barbershops and hair salons
- Consultants, including business, IT, marketing, financial, and career consultants
- Doctors
- Educators
- Engineers
- Graphic designers
- Occupational therapists
- Personal trainers
- Pet groomers and veterinarians
- Photographers
- Printing and publishing businesses
- Real estate agents
- Software and web developers
Certain professions are legally required to carry professional liability insurance because of state licensing requirements or industry regulations. Even when coverage isn’t required by law, clients may require proof of insurance before signing a contract, particularly in consulting, healthcare, financial services, engineering, and other professional industries.
How much does professional liability insurance cost?
On average, professional liability insurance will tend to run your business between $20 and $100 per month, but it could cost much more depending on your industry’s risk of a claim. Ensure you factor these costs into your monthly budget, especially if your business is required to purchase professional liability coverage.
Factors that impact the cost of professional liability insurance
Below are the various factors that can affect your professional liability insurance premium:
- Coverage limits
- Deductible amount
- Your business’s industry
- Your business’s location
- How large your business is, including how many employees and clients you have
- How long your business has been active
- Your claims history
How much professional liability coverage do businesses need?
The amount of professional liability insurance you need depends on the size of your company, the professional services you provide, your contractual obligations, and your exposure to potential lawsuits. As your business grows, takes on larger clients, or assumes greater professional responsibilities, increasing your coverage limits may help reduce your financial risk.
Here’s a quick breakdown of common coverage limits based on general business categories:
Keep in mind that increased risk can be a factor, regardless of your business’s size.
Professional liability insurance at a glance
Here’s a quick breakdown of what you should know about professional liability insurance:
- Professional liability insurance is a form of business coverage that covers lawsuits from clients and customers who allege your business has failed in its professional duties that result in their financial loss or other damages.
- Even if the lawsuit is only over an alleged claim, professional liability insurance can still cover legal fees and settlement costs.
- Some industries may be required to carry professional liability insurance coverage due to state laws or federal regulations. Others may need to carry it due to client requirements to ensure they can be repaired for damages if your business makes a mistake or error.
- Professional liability insurance typically features exclusions for certain claims, such as acts of sexual abuse or discrimination.
- Professional liability is a separate type of commercial policy from general liability, which is designed to protect your business from lawsuits involving injuries or property damage to non-employees.
- How much you’ll pay for professional liability insurance can vary based on your industry, the size of your business, coverage limits, and other factors.
How to save on professional liability insurance
Professional liability insurance can often be a costly, and sometimes required, addition to your monthly expenditures. Here are a few ways to help lower your premium and make this coverage more affordable:
- Compare quotes from multiple commercial insurance companies before purchasing a policy.
- Pay your annual premium upfront, as this often results in a discount.
- Review your coverage annually to make sure your limits still match your business’s risk profile.
- Raise your deductible amount—but be sure not to raise it higher than you’re comfortable covering if you make a claim.
- Bundle your professional liability insurance with other commercial policies.
- Reduce your risk of future claims by implementing quality-control procedures, documenting client communications, and reviewing work before it’s delivered.
The takeaway
You may think that professional liability insurance sounds like one of those things only needed by a large enterprise or a heavily-regulated industry like medicine and law. In fact, any business that provides professional services or advice should be willing to spring for it. In some cases, it may even be required by law or client contracts.
From a billion dollar corporation to a sole-prop freelancer, professional liability can help to safeguard your financial wellbeing in the event that a customer claims that your business has fallen short of its promise to them—and that mistake caused them a financial loss.
Frequently asked questions
Is professional liability insurance the same as errors and omissions coverage?
Yes, professional liability insurance is another name for errors and omissions (E&O) insurance. Both terms generally refer to coverage that helps protect businesses against claims of professional mistakes, negligence, or failure to deliver services as promised.
Does professional liability insurance cover legal fees?
Yes, professional liability insurance typically covers legal defense costs for covered claims, even if the allegations ultimately prove unfounded. However, policies generally don’t cover legal expenses related to excluded claims, such as criminal acts, intentional wrongdoing, or employment discrimination.
Is professional liability insurance legally required?
Professional liability insurance may be legally required depending on state laws and your company’s specific industry. For example, real estate agents in several states must maintain professional liability coverage.
Can a business have both cyber liability and professional liability insurance?
Yes. Cyber liability insurance and professional liability insurance cover different business risks, so many businesses carry both. Professional liability insurance protects against claims involving professional mistakes, while cyber liability insurance helps cover expenses related to data breaches, cyberattacks, and other cybersecurity incidents.
Should freelancers or independent contractors consider professional liability coverage?
Yes, freelancers and independent contractors who provide professional services or advice should consider professional liability insurance because clients can still sue them over alleged mistakes, negligence, or financial losses caused by their work.
