Do You Need Professional Liability Insurance?
Do you know everything you need to about business liability insurance? If not, you’re in good company. A staggering 96 percent of business owners surveyed by Next Insurance, a business insurance provider, scored 70% or lower — a failing grade — on general liability specifics.
The results get even more interesting when the survey focused on a specific type of liability insurance: Errors and Omissions (E&O) coverage, also known as professional liability insurance. While standard liability insurance offers protection from physical or property damage, E&O covers the financial losses of a client or business associate resulting from your mistake (errors) or failure to perform a required action (omissions).
According to the survey, small businesses are exposing themselves to excessive risks by not considering E&O coverage as an essential expense. In fact, E&O insurance is the third least-purchased type of insurance, rivaled only by product liability and cyber liability coverage.
Who needs professional liability coverage?
Not every small business requires E&O insurance That said, many more businesses can benefit from its protections than their owners may realize. For example, if a customer slips on a wet floor in the office of your contracting practice, that’s covered by your general liability policy. But if one of your crew cuts into an active water pipe on a construction site, the ensuing delays on the project could be covered by an Errors and Omissions policy.
Other examples:
An advertising firm introduces incorrect data that reflects poorly on its client’s competitor. E&O coverage could protect the client from a resulting lawsuit and damages.
An architect fails to include a critical support beam in a home design, and it’s only detected after the job is done and it’s being inspected. E&O could cover the homeowner’s cost of reconstruction.
An accountant omits expenses that result in her client’s costly audit and resulting penalties.
What to ask about Errors and Omissions coverage?
Talk with a business-insurance broker to confirm your business’s eligibility and need for E&O insurance and the amount of coverage you should carry. But in the meantime, get started with these basic questions:
What’s the nature of your business? Firms that provide advice-based services such as lawyers, architects, accountants, repair outfits, and healthcare providers, are prime E&O candidates. These businesses and others like them provide advice and services subject to human error.
Does your business structure expose you to personal liability? No matter what type of business you own — a sole proprietorship, limited liability company (LLC), or an S- or C-Corporation, your firm may be crippled by a great loss — or cease business entirely — because of a negligence claim against it. So if your business structure does not shield you from personal liability after such a judgment, that’s all the more reason to invest in E&O protection. Your best bet: Consult your lawyer to confirm the extent of your personal liability, relative to federal, state, and local laws.
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Do certain business relationships or standards oblige you to purchase Errors and Omissions coverage? Certain alliances and conditions may call for it:
A business you’re working with may have coverage written into your contract. By doing this, they lessen the impact of being affected by your negligent action(s).
If you’re licensed by a government or industry board, it may require E&O liability coverage.
Some industries consider E & O coverage a mark of credibility. Not having it may make your firm appear as if it’s not of the same professional caliber as its competitors.
Can E&O coverage enhance your professional profile? Your clients may feel more comfortable knowing that, in the unlikely occurrence of a mistake, they're covered from financial loss.
Cost versus benefits
A majority of businesses (39 percent) who have E&O insurance pay between $50 and $100 monthly for this coverage. Is it worth it? Consider this: Is even spending, say, $1,500 a year on insurance an easier pill to swallow than litigating a $5 million negligence suit? Even if you win, the cost of fighting such a suit can impact your bottom line, or worse. With E&O insurance, those legal costs would be covered.
Once you decide to pursue E&O coverage, consult with a business insurance broker familiar with your industry. Its professionals can provide guidance tailored to your specific business needs and recommend the right type and amount of protection.
More than half — 51% — of business owners responding to the Next survey say that making a professional mistake is among their top anxieties, after inflation, consumer spending, and supply-chain issues.
Source: Insurance Journal
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