By Jesse B. Jurgenson
Americans are more litigious than in the past1. For example, in 2007 medical malpractice costs totaled $30.4 billion suggesting that Americans still maintain an increased willingness to sue physicians and other health-care providers for alleged or actual acts of malpractice. The dollar amounts are staggering considering that this is only one professional area which may fall under the suggestion that professional liability insurance may be a necessity more than a luxury. Even if you have not made a mistake, it is still possible to be sued which may result in unforeseen legal expenses to resolve even the most absurd of allegations.
According to the Insurance Information Institute, if you provide any type of advice, expertise, or professional service, you risk being sued by a customer, client, or other party who claims he or she was injured due to your negligent act, error, or omission. This type of negligence is sometimes referred to as “malpractice.” Professional liability insurance, also called errors and omissions (E&O) liability insurance, pays the cost of your defense and any damages awarded, up to policy limits. Insurance companies have developed many specialized policy forms that respond to the individual risks characteristic of particular professions and services.
Professional liability insurance is available for a wide array of professional categories. It may take on different forms and names depending on the profession. For example, in reference to medical professions it is called malpractice insurance, while errors and omissions (E&O) insurance is used by insurance agents, consultants, brokers, and lawyers. Other professions that commonly purchase professional liability insurance include accounting and financial services, construction and maintenance (general contractors, plumbers, etc.), pharmacists, transporters, veterinarians, educators, mental health professionals, architects, engineers, optometrists, real estate professionals, dentists, and fitness professionals. Generally speaking, any profession that requires a high degree of education and/or specialized training who regularly gives advice to clients may want to research their potential risk exposure.
The reality is that when something happens and a patient (or client) is injured in some manner, including financial harm, most attorneys will name in the lawsuit everyone who was involved in the patients’ care or service. That happens whether you have your own coverage or not. But if you do have your own coverage, and are named in a malpractice (or similar) suit, your policy can protect you by preparing you for the legal process and paying for your defense and any settlement or judgment against you. Your employer’s policy may cover you, but only up to a point. Your employer’s policy is designed to fit their own needs and protect their interests first. If you have your own individual protection, you will have the benefit of your own representation that is concerned specifically with your interests.
Professional liability insurance is a specialty coverage and is not provided under homeowner’s endorsements, in-home business policies, or business owners policies (BOPs). Common claims that professional liability insurance covers are negligence, misrepresentation, violation of good faith and fair dealing, and inaccurate advice. It does not provide coverage in the event of criminal prosecution, nor all forms of legal liability under civil law.
If your normal business practice involves storing client or customer information electronically, cyber liability insurance offers various coverages in the event of security or privacy breaches including the loss of confidential information by allowing, or failing to prevent, unauthorized access to computer systems, cyber terrorism, or cyber extortion. Although this may be more relevant to business owners, cyber liability insurance coverage will likely not be automatically included on a professional liability insurance policy but may be available for purchase as a stand-alone policy based on the nature and scope of your business.
Some advantages to consider when decided whether to purchase professional liability insurance coverage are:
- Commercial general liability (CGL) insurance usually excludes coverage for professionals, mostly through the use of a professional services exclusion on CGL policies. This creates a potentially large exposure for the professional because the standard of care under which they operate creates a heightened liability exposure. Professional liability insurance helps to cover this exposure.
- Professional liability insurance claims often involve financial damages, which are generally not covered by a CGL policy. CGL policies respond to bodily injury, property damage, or personal injury (such as libel, slander, or invasion of privacy).
- It typically responds to claims alleging that the professional failed to perform as well as caused damages because of the way he or she performed. Failure to perform claims typically are not covered by the CGL insurance form.
- Some states require that professionals (such as doctors) carry professional liability insurance before they can be licensed. It is also not uncommon to see this requirement be present as a requirement to provide services through a specific contract or agreement.
There is an added cost to purchase professional liability insurance coverage. The amount may vary wildly based on your profession and desired levels of coverage.
How much coverage do you need? That can also vary. For example, a medical doctor is at a greater risk of being sued, and for a higher dollar amount, than a plumber would and therefore need more liability insurance. You can usually get a good sense of lawsuits involving your type of business through your trade association2 along with a list of potential coverage providers. An alternative option may be to contact an insurance company in which you have an existing relationship with and ask if they offer this type of specialized coverage.
Overall, whether or not to obtain professional liability insurance coverage is a personal choice whose costs and benefits should be evaluated. What is right for one household may not hold true for another. As with most insurance products, there are countless coverage options and specific limitations of each product. Talking to an insurance professional and gathering all of the facts necessary to make an informed decision may be the best first step to take.
Guest contributor Jesse Jurgenson is an AFCPE Accredited Financial Counselor and past Financial Counseling Supervisor with an NFCC certified non-profit family service organization. He is also a current Ph.D. student and Graduate Instructor in the Personal Financial Planning Department.
 Rejda, G.E. (2011). The Liability Risk. In Principles of Risk Management and Insurance (pp. 429-432). Boston, MA: Pearson Education.
 Leimberg, S.R., Price, K.W, & Pedre, J.M. (2015). Professional Liability/Errors and Omissions Insurance. In Insurance Planning and Risk Management (pp. 353-356). Erlanger, KY: The National Underwriter Company.