On average, small businesses earning more than a million per year spend $20,000 on frivolous lawsuits, and annually 50% of civil lawsuits target small businesses.
For some small businesses, one lawsuit could put you out of business.
The insurance industry helps small businesses protect themselves through professional liability, or PLI, insurance.
If you’re concerned about the risk of lawsuit, find out how a PLI policy could give you peace of mind.
What is 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.
What does Professional Liability Insurance Cover?
A professional liability insurance policy would cover claims related to any of these items:
Mistakes or oversights in work performed
Services that weren’t delivered
Lawsuits relating to the financial consequences of missing deadlines
Claims of breach of contract
What does Professional Liability Insurance Exclude?
Like all insurance policies, a professional liability insurance policy will have exclusions. However, that’s because a different type of policy would provide better protection.
Most professional liability insurance policies exclude:
Bodily injury –
If a product or service you provide injures a client, professional liability insurance coverage would not kick in. Instead, product liability or general liability insurance would offer protection.
Property damage –
Intentional wrongdoing –
If you got in an argument with a client and turned in poor work, your professional liability insurance could decline to cover any resulting legal costs.
False advertising –
If you misrepresented your qualifications, certifications, degrees, or other professional markers that meant you were qualified to provide the services you gave a client, it’s false advertising. If the client then sues you, your professional liability coverage would not cover those costs and associated settlements.
Acting illegally –
Similar to the above, if you did or your employees did break the law, and it resulted in a lawsuit, do not expect your professional liability insurance to protect you.
If you or your employees acted in good faith, and abided by common professional standards and ethics for your industry, it’s unlikely that you’ll be denied coverage due to illegal actions or intentional wrong doing.
Which Small Businesses Need Professional Liability Insurance?
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 manage or account for someone else’s money, or audit their books, accounting errors, data entry errors, miscalculations, or lost documentation could lead to a lawsuit. In many cases, the client may ask to see proof of insurance before working with you, as it also provides indirect coverage to them.
Consultants provide advice, calculate projections, or work on special projects. All of this opens them to potential issues if the outcome doesn’t match client expectations or predictions prove to be inaccurate.
Health and Fitness Professionals –
Are you a personal trainer, independent in-home fitness consultant, or yoga instructor? A client injury could cost you more than lost business.
If you design buildings, bridges, or spaces, you know the risks associated with inaccurate calculations. Even a designer’s clients might sue if inaccurate measurements led to ordering non-returnable furniture that doesn’t fit the space. If you operate a firm that provides these services to clients, your employees might want to know that they have this projection.
Real Estate Agents and Brokers –
If you’re an agent or broker, you work with large sums of money. The legal implications of forgetting to file an appropriate form, failing to point out an issue when walking through the house, or selling someone a “lemon,” could result in expensive court costs. Even if you’re innocent and the client is simply acting in bad faith, legal fees, court costs, discovery fees and investigations, they all add up.
IT Professionals and Software Developers –
Contractors or contract firms who are paid to develop software on someone else’s behalf face unique risks. What if the software has a flaw that allows hackers to access sensitive information? What if it fails to function as designed? Consider protecting yourself with errors and omissions 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.
Who does Professional Liability Insurance Cover?
Professional liability insurance policies cover any employee or representation of your business.
If you need a higher level of coverage for executives, consider a Director’s and Officer’s (or D&O) policy.
What does a Professional Liability Insurance Policy Cost?
Costs vary, but in general, the cost of professional liability insurance ranges from $550 to $700 a year, or roughly $46 to $58 a month.
Around 58% of businesses pay less than $51 a month for coverage, with 33% paying between $51 to $100 a month.
The average partner rate for a lawyer at Arizonan firms is $350 an hour. PLI is an extremely affordable way to protect your business.
What Affects a Professional Liability Insurance Policy’s Cost?
The cost of your professional liability coverage depends on the following:
Number of employees
Years in business
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.
What are Common PLI Limits and Deductibles?
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.
When does Professional Liability Insurance Coverage Kick In?
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.
Now It’s Your Turn
Why Your Small Business Needs Professional Liability Insurance?
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