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What is professional liability insurance and why do you need it?

One question people ask me a lot is: what is professional liability and what does it cover? Professional liability is like a general liability policy for industries that provide service and/or advice.  It is also commonly referred to as errors and omissions insurance.

This is not to say that a general liability policy should not be chosen in addition to a professional liability policy for these service industries. In some cases, especially when there is an office where customers visit, a general liability policy should also be considered.

Professional liability policies not only pay out for any awarded damages to another party but they can pay your cost of defense in these situations as well. So even if a suit is unwarranted, the cost to defend yourself can cripple your business if you don’t have a policy in place to protect you for this.

 

What types of industries need professional liability or errors and omissions policies?

What is a retroactive or retro date?

Professional liability policies are on a claims made basis. What this means is that your policy would cover any losses that arose during that policy period only. A retroactive date can be used on these policies that will go back to the original date you began your business.

So if your policy was in effect from 04/01/2018-04/01/2019, your expiring policy would no longer be on the hook for any claims made after that expiration date of that policy. If you moved to another insurance company that began on 04/01/2019 then they would pay out on any claims made after 04/01/2019 regardless on when the said error occurred.

If you started your business in June of 2003 than that would be your retroactive date on your policy so any losses during that policy term would pay out for any errors that occurred since your business began. This is why your rates for errors and omissions policies increase the longer you are in business.

What is tail coverage or extended reporting period?

Tail coverage, also known as extended reporting coverage, cover claims arising after the policy period is over.  This is common on a business owner that retires or sells his business.  You pay a premium based on how long this tail coverage extends for.

What does retention mean in professional liability?

Retention, when referring to professional liability insurance, refers quite simply to your deductible.  Typically deductibles chosen are much higher for these policy types.  Most common retention ranges from $0 to $10,000 with the most common around $2,500.  This means that if you have a loss you will be responsible for your deductible before your insurance company begins paying on the claim.  Keep that in mind if you choose a higher retention option.

What are some common claims covered on professional liability?

• Errors
• Omissions
• Breach of contract
• Misrepresentation
• Inaccurate advice

Let’s give a few more examples of real life claim situations.

• A computer consulting and security company provides you with advice on how to keep your computer server and customer data safe.  The advice they provide is less than adequate to prevent a data breach.   This results in client information being stolen.  You then file a professional liability claim against the consulting company’s policy.

 

• You hire a property manager to manage a rental property for you.  A guest of the tenant falls due to a broken step.  You file a claim against the property manager’s professional liability policy for failure to maintain safe conditions of the property.

 

• You buy a property from a real estate agent to use as business office.  Your agent wrongfully tells you that this will be fine.  Due to zoning laws, you are forbidden from using that property for your business office.  You file a claim against the real estate agent’s professional liability policy.

 

You should be aware that a professional liability policy is likely not enough for you to be covered in every situation.  These policies will not cover you if you cause bodily injury or property damage to someone outside the scope of a professional liability policy.  This is why we would recommend you having a general liability or BOP policy to supplement this policy to avoid any uncovered items arising.

If you have any further questions as to what policy is best for your business, please give us a call at 704-494-9495 and we would be happy to discuss any questions you may have.

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