Here’s what you need to know about professional liability insurance

As an entrepreneur, you want to make sure you’re getting coverage you actually need in case you make a mistake. Slip-ups happen, and when they do, they can put your business at risk. You’ve put in the hours to build your business, and it’s only natural that you want to make sure it’s protected.

That’s where professional liability insurance comes in. Whether you’re in professional services, beauty, manufacturing or another industry, professional liability coverage can provide financial protection for you and your company against any errors and omissions that may result in an upset client taking legal action. Still wondering if you should get professional liability insurance? Read on to learn more about what it is, what it could cover, who needs it, how much it costs and other key details.

Professional liability insurance, also known as errors and omissions insurance (or E&O insurance), protects your business if a client files a claim or lawsuit for errors, omissions or negligence in your professional services resulting in financial harm to them.

Claims like these can lead to hefty legal fees, even if you aren’t actually liable or the claim is unfounded. These legal fees can add up fast, and without insurance coverage, errors and omissions claims can put your assets at risk and your business’s finances in hot water. E&O insurance coverage can help reduce financial and legal headaches while building your reputation and credibility as a business.

Having professional liability insurance sends a good message to your clients and puts their mind at ease. Some professionals, like barbers, hair stylists, estheticians and woodworkers, are required or strongly encouraged to carry coverage.

You’ll be happy to hear that professional liability insurance could cover your business and employees—and that includes volunteers, leased workers, temporary workers, interns, consultants and independent contractors under your supervision or management. When you protect your business, you’re also protecting the people you work with. So, what errors would trigger coverage under your policy?

Professional liability insurance helps protect your business when mistakes—real or alleged—lead to client losses. The sections below will walk you through the main types of situations this coverage can come in handy.

As you might have guessed from the name, errors and omissions insurance covers liability arising from professional errors and omissions, as well as negligence committed in the course of your professional activities. Say you offer tax preparation services and a data entry clerk reverses amounts in an income tax return, which results in the client not being eligible for a government aid program. If the client sued you for the monetary loss and won, your professional liability insurance could help protect you.

Errors and omissions coverage also comes in handy if a client claims they suffered losses because your business failed to advise them properly or provided inaccurate or incomplete advice. For instance, a client might allege that one of your consultants’ recommendations drove operating costs up instead of down. Dealing with allegations like these can be extremely stressful, especially for small businesses that don’t always have the resources to handle these cases on their own. That’s when having E&O insurance could prove valuable: Your insurance provider can support you every step of the way.

The main takeaway here is that these are examples of accidental errors. Your professional liability insurance can be helpful when this type of fault is alleged against you.

It takes money to defend yourself even if you’ve done nothing wrong. Professional liability insurance could cover your legal expenses even when no fault is found against you.

Now that you know what types of professional errors your E&O insurance could cover, you might be wondering what financial losses your policy might pay for. Once a claim has been opened, your professional liability insurance could cover:

• Any legal costs related to the investigation and your defence
• Financial losses incurred by your client that result in a settlement
• Money you are legally required to pay because of a covered claim

As mentioned above, E&O insurance coverage is there for you when mistakes happen. That said, professional liability insurance doesn’t cover dishonest, fraudulent, criminal, voluntary or intentional acts; fines or penalties or administrative penalties or any other similar sums; or abuse. It doesn’t cover punitive or exemplary damages (money a court may award to punish unacceptable behaviour, rather than to compensate for a real loss) either. Faulty construction work also won’t fall under your professional liability policy coverage.

Risk is industry-specific. If an error or omission made in the course of your professional activities could lead to a client losing money and taking you to court, it’s a good idea to get professional liability insurance.

One of the key advantages of professional liability insurance is its flexibility. It can be tailored to the unique risks of your profession. The examples below show how this coverage applies across different fields, and why having it matters:

You’re consulting to help a client with manufacturing efficiency. You recommend installing a massive machine 50 centimetres from a factory wall. Unfortunately, regulatory standards require the machine to be 1 metre away from the wall. Your client now has to pay to move the machine and get it up to code, and they decide to sue to recover the costs.

A product your company made for a client turns out to have a design error. It doesn’t meet the written specifications and can’t be used. Your client is demanding you cover their loss of income until the error can be corrected.

A client at your salon has an adverse reaction to the hair dye you use, resulting in burns on her scalp. She decides to take you to court for her injuries.

An employee at your bookkeeping firm forgot to enter one of your client’s bills, which led to your client missing a payment. As a result, the vendor ceased all services, forcing your client to shut down operations for several days. Your client decides to sue to recoup the loss.

All liability insurance is the same, right? Not quite. There are a few major differences between commercial general liability and professional liability and, in the overwhelming majority of cases, you’re going to want both.

Commercial general liability insurance provides coverage for bodily injury or property damage to a third party. For example, a client walks into your beauty or hair salon on a snowy day, slips and breaks a leg. Your commercial general liability insurance would cover their injury, but your professional liability insurance would not. If a client at your salon claims their hair was damaged from hair dye being left in too long, then your professional liability insurance would handle it, but your general liability insurance would not.

Here’s a quick breakdown of what each type of liability insurance covers, plus some examples:

• What’s covered: A lawsuit brought by a third party who has suffered bodily injury or property damage, or certain types of losses.
• Examples:
  • A client’s hardwood floor is damaged as a result of work carried out by a painting contractor.
  • A patient slips on your icy steps and breaks a wrist.
  • Fire starts and spreads from your office to neighbouring buildings.

• What’s covered: Error, omission, negligence and defence expenses for any claim for which coverage applies
• Examples:
  • Your client had to sell a product at a discount because of a spelling mistake on the label, resulting in a loss of income equal to the price difference.
  • You provide inaccurate advice that leads to your client losing money.
  • An esthetician at your beauty salon uses a lotion that causes a client with sensitive skin to have a severe allergic reaction.

Like with any insurance policy, there are many factors that influence the price point. Because professional liability insurance is tailored to your specific needs, prices may vary widely and depend on:

• Your business’s size and revenue
• Your experience and qualifications
• Your claims history
• Your coverage levels (limits and deductibles)
• Your services

When comparing different policies, price point isn’t the only thing to keep in mind—you also need to look at the coverage. It’s important to understand exactly what will be covered under the policy. Save yourself any unpleasant surprises down the line and make sure to compare your coverage options.

The best way to find the right insurance coverage for you is to speak with an insurer for a quote that addresses your specific needs. They can help you figure out what risks you are exposed to and what coverage limits will work best for you.

Errors and omissions don't have to cost a fortune. Mistakes do happen, but defence expenses and client compensation don't need to bankrupt your business. When you take out professional liability insurance with coverage limits that align with your business's needs, you can have peace of mind that your insurance company has got you covered.

If you still have questions about professional liability insurance or want to make sure your current policy has got you covered, reach out to one of our insurance agents.
 

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