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Should Your Small Business Have Professional Liability Insurance?

Professional Liability InsuranceDoes your small business provide services and professional advice to clients? If so, you could be leaving yourself or your company open to a lawsuit if you lack professional liability insurance.

What Is Professional Liability Insurance?

Professional liability insurance, also referred to as errors & omissions insurance (EOI), covers a professional service provider or their business in the event that a client claims you:

  • Provided inadequate, negligent, or inept services
  • Failed to provide services as described
  • Delivered services that did not achieve the promised or intended results

In other words, the coverage protects you should a mistake (or the perception of a mistake) on your part result in a financial loss for a client.

What Does Professional Liability Insurance Do?

Professional liability insurance protects businesses and business owners who provide professional services. Service providers can be sued for mistakes, errors, omissions, malpractice, or negligence.

The insurance coverage provides protection for the cost of mounting a legal defense as well as for any judgements or settlements.

Why Do You Need Professional Liability Insurance?

Businesses that provide services and offer expertise can benefit greatly from professional liability insurance. For these businesses, providing inaccurate advice or failing to provide a particular service could result in a major lawsuit. Even if no mistake was made, your business could still face a costly lawsuit from an unhappy client.

If a client misinterpreted your good-faith professional advice, resulting in a financial loss, the client may decide to sue you. If your client is a large corporation, your legal fees could quickly add up. Even in cases where the client’s claims are unsubstantiated or deemed groundless, thousands of dollars in legal fees could be spent to have the case dismissed.

Who Needs Professional Liability Insurance?

A variety of professionals can use professional liability insurance to protect their business and its assets, including:

  • Accountants
  • Ad agencies
  • Architects
  • Attorneys
  • Business consultants
  • Engineers
  • Financial advisors
  • Hair Salons
  • Insurance professionals
  • IT consultants
  • Management consultants
  • Marketing consultants
  • Medical professionals
  • Notaries
  • Real estate professionals
  • Technology consultants
  • Wedding planners

In general, if you give professional advice or provide professional services for a fee, you should consider purchasing coverage. In some states, coverage may even be mandatory, depending on your profession. This is usually the case for doctors and attorneys.

How Does Professional Liability Insurance Differ from Other Coverage?

You may have heard of other types of small business liability insurance. There are actually three types of liability insurance, but each type provides a different type of protection.

General liability insurance provides protection from a wide range of legal actions related to accidents, injuries, or negligence claims against your business. While general liability is a good base coverage option for many businesses, it does not extend to the types of claims covered by professional liability insurance.

Product liability insurance is another type of liability coverage centered around physical products, as the name implies. Manufacturers, distributors, wholesalers, and retail businesses purchase this type of coverage to protect against a situation where a product defect could cause an injury or financial loss. While product liability coverage is specialized, it doesn’t apply to service-related claims.

For these reasons, professional liability coverage exists.

How Do You Choose Your Coverage?

Your best bet to secure the right amount of coverage for the best price is to talk to your insurance provider. A business owners policy (BOP) can be a good choice small businesses that need professional, product, and general liability coverage, but could be overkill for a business owner who doesn’t deal with products. The best way to learn more about your options is to ask. And if you do provide professional services, the best time to ask is before you are exposed to a potential professional liability risk.

Remember, mistakes happen, even to the most competent professionals with the best of intentions. A simple typo could result in a client who loses a shipment or misses a sale worth millions. Beyond the immediate loss, future business with the client could be in jeopardy, and your professional reputation could be damaged. Liability coverage could help minimize the loss for the client and yourself.