Do I Need Professional Liability Insurance as a Small Business Owner?

Professional liability insurance, also known as errors and omissions insurance or E&O, protects your business if you are sued, even if you haven’t made a mistake. You should seriously consider this coverage if your business:

  1. Provides a professional service
  2. Regularly gives advice to clients
  3. Is requested by a client to have professional liability insurance to complete a contract.

The major benefit to having a professional liability policy in place is that it will protect you and your company from having to pay for legal defense costs and damages in the event of a covered lawsuit.  It’s separate coverage from standard general liability or property insurance, but well worth it because the coverage includes legal defense costs even if the allegations are baseless.  Your professional liability policy will pay defense costs, the judgments against you, and the associated court costs for covered claims, up to your policy’s coverage limit.

Here are some specific examples of industries in which practitioners benefit from E&O coverage:

  • Business consulting: Business consulting spans a wide range of services. For this example we’ll focus on a PMP, or project management professional.  Say you’ve been asked to organize a way-overdue project, which you promise you can bring to completion.  Only after you dig in do you discover that the previous PMP presented a less-than-accurate picture of the project’s circumstances and in reality you’re facing a scope of work that is twice as long as your original projection.  When you notify your client they get angry and accuse you of not doing your due diligence before signing the contract.  Your  professional liability insurance will protect you and your company up to your policy’s coverage limit if this were to arise in a lawsuit.
  • IT: A major trend in IT is storage in the cloud and as an up-to-date IT professional you may advise clients on using cloud-based tools.  They do so and all goes well, but one client falls victim to a hacking attack and decides to sue you for damages.  Since most cloud-based service providers include clauses in their terms and conditions that limit their liability for breaches and other incidents you could be left holding the bag.  But if you have an E&O policy you have the financial and legal protection to weather this storm.
  • Real estate: With the continued decline of property values, buyer’s remorse is a bigger problem than in decades past.  Clients may feel like they overpaid for their new home and blame you for not negotiating a better price.  If you find yourself in the uncomfortable situation of being accused of negligence in researching a home’s value, professional liability insurance will protect you – even if you haven’t made this mistake and the allegations are groundless.
  • Architecture and engineering: Even the best-laid plans can go awry, and nowhere is this truer than in construction.  Let’s say a designer misinterprets your renderings and orders costly materials that simply won’t work with the plans you carefully drafted.  The client is understandably upset and needs to blame someone – and that someone is you.  He files a suit for professional negligence and demands that you reimburse him for the useless materials.  Even though it’s not your fault you have to appear in court, which will be much easier with the attorney appointed by your professional liability policy provider there to defend you.

These are a few specific examples of how certain industries benefit from having professional liability coverage. But just because your industry wasn’t directly mentioned, that doesn’t mean you should let a false sense of security stop you from purchasing PL coverage. If your work includes providing professional services, giving clients advice, or if your clients request/require it to complete a contract then professional liability insurance should be a must-have for your small business.

The contents of this article and the linked materials do not offer legal, business, or insurance advice related to the needs of any specific individual business. Claim scenarios are for illustrative purposes only and are subject to the terms and conditions of the policy in question. Please consult your professional advisor. 

Kevin Kerridge is the director of small business insurance for Hiscox, a company that provides customized business insurance for small business professionals such as consultants, IT professionals, bookkeepers, real estate agents, architects, engineers, and many more.


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