If you regularly provide professional advice or services, you can be sued - even if you do everything right. Do you have the right insurance to protect yourself?
Professional liability insurance – sometimes also known as errors and omissions (E&O) or medical malpractice, depending on the profession – provides financial protection against claims of negligence, misrepresentation or inaccurate advice. This includes the costs associated with any expenses or legal fees required for your defense, as well as any resulting judgments against you.
It does not provide any protection against someone’s claims of bodily injury or damaged possessions suffered at your place of business or caused by you or your employees. That’s what general liability insurance provides. In addition, professional liability coverage doesn’t cover copyright infringement, patents or trademarks or malicious, dishonest, criminal or illegal acts.
Do you really need it?
Depending on your type of business or profession, some states and many contracts require proof of professional liability insurance, but even if it’s optional, it is wise to discuss options with your insurance professional if you regularly offer an opinion that clients could challenge or if a service you provide could result in financial or emotional distress to them.
Think of consultants, accountants or those offering advice about the law, medicine, real estate transactions, building and remodeling, finances, interior design or even beauty services. In all of these industries, there is room for interpretation of facts and plenty of gray area based on opinion. Your professional recommendations depend largely on your own experience, and you could be wrong.
Alternatively, you could be right, but the client just isn’t happy with the outcome and wants to find fault somewhere.
The truth is that just one client calling your service into question is enough to wipe out a career’s worth of hard work.
It’s all about the timing
Most professional liability policies are written on a “claims-made basis,” meaning you’re protected for claims that are made only when the policy is in effect.
However, for an additional cost, you may be able to select a specific “retroactive date,” which specifies how far back in time the policy will cover a claim.
- If you are changing professional liability policies, your new policy should be retroactively dated to when the prior policy started so that any work done before the new policy began will still be covered.
- In addition, if you have newly decided to carry professional liability insurance, you can have the policy backdated using a retroactive date to provide protection for previous work done when you were not insured. However, your motives in this scenario will be considered to make sure you are not buying and requesting a retroactive date to cover a claim you are just now anticipating.
- Be aware that retroactive dates may come with a higher premium because the insurance provider is taking on more risk, so it’s typically best to begin professional liability coverage when you begin working in an applicable industry instead of waiting.
Your professional liability policy may also include an “extended period” of protection after the policy ends. This is generally a 30- to 60-day period, but you can increase the specified time to a year or more – for an additional cost. This provides a buffer if you decide to change policies or close your business but still believe a client may sue for prior services provided.
Know the details
There is no standard professional liability insurance policy, so you’ll need to compare your options to know which is right for you. In addition to the covered time frame mentioned above, be sure to ask:
- Are all legal costs applied to your main policy limit, or do they have their own limits and are paid separately? (Of note, professional liability policies cover legal fees associated with civil suits only, not criminal cases.)
- Are you fully covered for a claim that is filed during your active or extended policy period regarding an incident that occurred prior to that period?
- Does the policy automatically cover anyone working on behalf of your business (both employees and subcontractors), or must all individuals be specifically named?
- Are there any policy exclusions, or does the policy cover only specifically named risks?
The cost
Your particular premium for professional liability protection depends on your unique situation. Your industry, prior claims history and the types of services you provide will impact how much you pay. If you are considered a bigger risk, this will be reflected in your premium amount. However, whatever the price, remember that even a frivolous, unfounded lawsuit can create a major financial setback.
If you are concerned about the monthly amount, talk with your insurance professional about cost-saving strategies, including an appropriate increase to your deductible, a manageable reduction in policy limits, or a realistic change to the categories of coverage.
In addition, remember that the IRS categorizes insurance policy premiums – including those for professional liability – as a business expense, so you can deduct premium payments when you file taxes.