What is Professional Liability Insurance and Why Do You Need It?

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August 27, 2020

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Mistakes happen, but they don’t have to hurt you. Professional liability insurance (PLI) can cover you when something doesn’t go according to plan. Let’s review what you can do to be prepared for any claims made against your business.

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What is professional liability insurance?

PLI protects your business against everyday mistakes and claims initiated by clients. You may have come across different terms for the same insurance. Some examples are professional indemnity insurance (PII), or errors and omissions (E&O). These plans will protect you from expensive malpractice, misrepresentation, or negligence lawsuits making it essential for businesses in accounting, consulting, legal or medical advice.

For other recommended types of insurance, check out our complete guide on small business insurance.

Do I need professional liability insurance?

A question that comes up often about PLI is whether companies need it if they’ve got general liability coverage. The answer is most definitely yes.

A majority of general liability policies do not cover claims coming from the services you provide. General liability policies cover injury lawsuits or property damage, but not claims from your primary line of work.

Professional liability coverage works on a claims-made basis. You are to disclose any claims against you when you are informed about them. As long as the event happened after the Prior Acts Date, you will be protected. The Prior Acts Date will be set by your policy and protect you if a claim is made after you purchased the insurance, but for an event that happened before. This safeguards your business even against claims that occurred before purchasing your policy up to a specific date.

To err is human. Even if you are the absolute leader in your field and have years of experience, a mistake can happen. This could mean a dissatisfied client ready to sue. Some will want to be paid damages, and others compensated for emotional distress. PLI covers the whole range of issues and protects you against them. A preferred PLI policy will pay for both the defense costs and cover settlements reached and damages awarded.

If you’re considering PLI or protecting yourself with other insurance policies, review our guide on the best providers to start your search.

What does a professional liability insurance policy cover?

Examples of such accidental slips covered by the insurance are:

  • Poor guidance: After acting on your advice, the client lost a significant amount of money or sustained other losses.
  • Misrepresentation: A product or service did not arrive at the client’s address in the agreed time and manner.
  • Violation of good faith: You did not convey all essential information to the clients or failed to cooperate and communicate with them.
  • Copyright infringement: As long as it was unintentional, E&O insurance will protect you from such claims.

What is not covered by professional liability insurance?

To put it simply—deliberate violations and malicious acts.

PLI will cover you if the mistake or omission you make is not premeditated. If evidence shows that you had the intention to do something dishonest or illegal, the policy will not cover it. Do not expect protection if you knew about the claim prior to obtaining the insurance.

If you get the insurance after finding out about a claim, it will not go unnoticed. Report issues as they arise and don’t present an old case as a new one. Insurance providers are speedy in identifying these cases. If you’re continuously insured, and have no gaps in your coverage, you’ve got nothing to fear.

As mentioned above, injuries and property damages do not fall under professional liability policies. They are covered by general liabilities insurance.

Coverage only applies during the policy’s duration. Beware that you might not be covered if the issue occurred before the retroactive date—when you began buying professional liability insurance continuously.

This fact emphasizes the importance of protecting yourself with professional liability insurance. You should consider it as soon as you open your business. Remember that you need to renew it constantly as any claims that occur in the gap between policies will be left uncovered.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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