Why Your Small Business
Needs Professional Liability Insurance

Professional liability insurance is also called “errors and omissions,” because it’s designed to cover instances where your business commits an error or makes an omission.

It covers the costs of a legal defense, settlements, and judgements from any client lawsuit that claims work was unsatisfactory.

If your work causes financial damage to a customer, they may seek to recover those costs through legal methods.

While every small business owner should consider their risk exposure and potential need for professional liability insurance, there are some businesses and industries which are known to have a higher risk.

It’s more likely that a client might sue over an error, or the government might pay closer attention to your activities.

Businesses that provide services based upon specialized skills are particularly at risk.

Clients hire you based upon the assumption that you have the skills to provide those services.

While all humans make mistakes, clients generally don’t appreciate it when those mistakes cost them money.

If your small business falls into one of these categories, you definitely need professional liability insurance:

If you do not operate in any of these industries, assess your risk exposure before deciding you don’t need a professional liability insurance policy.

Do you still provide a high amount of services to clients? At what volume, and for what amounts?

If you are still in a largely services-based industry, where you are providing high dollar amount services to your customers, you should talk to an agent about professional liability insurance.

Certain industries represent more risk than others. A business in the construction or building industry will pay more for their policy than a finance and accounting firm.

Coverage limits can either apply by occurrence or have a limit. If they apply by occurrence, the policy would pay up to your limit for any single claim. If you have a $1 million limit, they could pay $1 million for one lawsuit and another million for a different lawsuit. Because the insurer’s risk is higher, this policy will cost more.

Or, if you purchase a policy with an aggregate limit of $1 million, they will only pay out $1 million during the policy’s lifetime. The lifetime may only be one year, but this policy represents less risk to the insurer and premiums will be lower.

The deductible always impacts a policy’s total premiums. If you’re willing to pay a higher deductible before the policy’s coverage kicks in, the insurer will have to pay less if you file a claim. Since they will have a lower overall payout, your premium will be lower with a higher deductible.

The location your business operates in also impacts your premiums. If you are in an area that’s had a high incidence of claims filed in the past, you’ll pay more. As well, a larger population indicates a higher likelihood of being sued.

Lastly, the number of people you employ will influence your premium amount. A small business with ten employees will pay a lower premium than a mid-size business with 200 employees. This is because the policy must extend to cover more people and, therefore, more risk.

Business turnover represents the amount of work you’re performing. If you’re performing a high volume of work, there’s a higher likelihood that something will go wrong and more opportunities for a lawsuit.

If you’ve been in business for over twenty years, you’ve built a strong knowledge base and the expertise to support your operations. To an insurer, a business with a twenty-year history of successful and claims-free operations is less risk than one that’s only been in business two years.

Claims history is another factor that insurers look at closely when pricing a policy. If you’ve filed one or more claims in the past they have cause for concern about your business practices. This is particularly the case if you’re shopping for a new policy right after filing and resolving a claim elsewhere.

All of these factors will directly impact your total premiums, but two are directly within your control.

If you choose a lower limit or pay a higher deductible, it will decrease your total premiums.

Small firms sometimes choose a zero dollar deductible, unwilling to face any risk of expenses hurting their business if they’re sued.

Most firms choose a deductible between $2,000 to $5,000, an amount they could easily cover from their savings and investments or operations. Larger firms might choose anywhere from a $25,000 to $50,000 deductible.

Over 88% of small businesses choose a policy limit of $1.0 million dollars, making it the most common limit. Only roughly 12% of small businesses choose higher limits of $2 to $5 million.

An insurance agent can help you determine the amount of coverage you need and the deductible you can afford. They’ll also know what’s common for your industry and offer sound advice on protecting yourself from lawsuits.

It’s most common for insurance companies to write professional liability insurance policies on a “claims-made” basis” with a retroactive date.

To collect your insurance benefits, your professional liability policy must be active both when the alleged mistake happened and when the claim is filed.

With this type of policy, coverage kicks in only when you file a claim while the policy is active. You can’t wait until you’re getting sued to purchase protection, in other words. It’s important to maintain uninterrupted coverage if you don’t want to pay out of pocket for lawsuits.

An occurrence policy works best if you’ve retired, closed your business, or sold it to someone else. It will cover claims for an event that took place while covered, even if someone files the lawsuit after the coverage lapses. Under this policy, you’ll have lifetime coverage.

If you have questions about PLI, the independent agents at Insurance Professionals of Arizona are here to help. They’re happy to help you assess your business needs and determine how you can purchase protection for now and the future.