Also known as errors and omissions insurance (E&O), professional liability insurance picks up where general liability leaves off and protects against failure to perform in a professional manner. General liability is a foundational coverage, therefore it applies to many businesses. It covers liability associated with damage to things or injury to people, but not the industry-specific risks of many professions. In fact, to make this distinction clear, many general liability policies contain exclusions for professional liability.
To understand the difference between the two coverages, consider a client who is injured at an accountant’s office by falling on a wet floor next to the water fountain. This would be a general liability claim since the injury was not a result of the accountant’s profession. In fact, the same harm could occur at a grocery store, doctor’s office, or most business where clients visit. However, if the accountant files erroneous tax returns for the same client, causing them to be subject to tax penalties, that is more appropriately covered by a professional liability insurance policy.
Professional liability insurance covers damages as a result of negligent performance, and is usually industry-specific, ensuring protection for the unique risks associated with each. For example, professional liability for doctors will provide different coverages than architects.
Legal defense costs and related expenses are generally also included. It is important to determine whether these costs are covered inside or outside the policy limits. The latter is better since defense costs will not reduce the amount available for damages.
Who Needs It?
Any business practicing law or medicine has a clear need for professional liability insurance. Additionally, accountants, engineers, architects, investment advisors, insurance agents, and many service-related professions commonly need this coverage. And depending upon where the business is located, this coverage may be required by law. Certain jurisdictions even specify minimum limits.
However, many other professions need this coverage as well. Sometimes the chance of a professional liability claim is small; but should one occur, damages can be great. Consider a manufacturer of wood roof trusses. Most of these businesses design the trusses they build. Should one deliver trusses that do not meet architectural load specifications, the business could be liable to not only supply new trusses, but also for the cost of replacing the old ones. Imagine the price of removing and replacing trusses should the error be discovered after they are installed! In such an example, no person was injured, and no property was damaged (general liability). Yet, the general contractor would certainly demand payment for the additional cost.
If in doubt whether your company needs professional liability insurance, ask your insurance agent.
Exclusions and Limitations
Professional liability insurance policies vary, so read yours carefully. Below are a few common exclusions and limitations.
- Intentional Acts: In general, professional liability insurance does not cover dishonest or intentional acts. One example would be fraud, which is properly covered by commercial crime insurance.
- D&O: Directors and Officer’s liability is a type of professional liability but is properly covered by a D&O Insurance policy.
- Employee Disputes: While professional liability insurance may cover mistakes made by employees, it does not cover internal disputes. Protection for sexual harassment, favoritism, discrimination, nepotism, or wrongful termination are properly covered by employment practices liability insurance (EPLI).
- Other: Injury to employees (workers compensation insurance), auto accidents (commercial auto insurance), and data breach (cyber liability insurance).
Overall, professional liability policies offer specific coverages, not broad-brush protection. Work with your insurance agent to see which coverages are necessary for your business.
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