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What is professional liability insurance (E&O)?
With general liability insurance coverage, your business is protected from many claims, but there are still some coverage gaps. Professional liability insurance, also known as errors & omissions or professional indemnity insurance, protects against financial loss as a result of malpractice, errors and/or negligence.
Unlike general liability insurance, which often has a completed works clause for continued coverage after the contract ends and even after the policy lapses, E&O coverage is generally issued on a claims-made basis. This means that coverage only exists so long as the policy is active. If coverage lapses after the completion of the contract, any claims made by your client or customer will not be covered by your professional liability policy.
Who Needs It?
Almost anyone who runs a business should have an active professional liability policy. It protects your business from potentially destructive loss in a claim. In almost any field you could be exposed to professional liability risks and protection against these claims is vital to the protection of your business. No matter how careful you are, mistakes can happen; take steps so that one mistake doesn’t ruin your business.
What’s Covered?
Professional liability insurance covers a variety of errors and omissions related claims. Coverage often provides for the defense costs, including when the legal action against you turns out to be groundless.
Work Errors
This part of the coverage focuses on the policyholder’s failure to perform part or all of the job as it was meant to be, per their contract and any financial loss caused by the policyholder.
For example, an electrician installs fixtures into a large office building. Upon inspection, the client notices that the wrong fixtures were installed in many of the offices. The cost of the replacement fixtures and their installation, as well as the property owner’s lost revenue from the delay in building occupancy could be covered by E&O insurance.
Undelivered Services/Omissions
This part of the coverage focuses simply on the policyholder’s failure to perform part or all of a job.
A carpenter is commissioned to custom build all of the furniture for a boutique restaurant and deliver it before their grand opening. Upon delivery, the restaurant manager notes that the order is missing several pieces of furniture. If the carpenter cannot produce the needed pieces before the opening, he can be sued for the profit loss from either a delay in opening or the reduced seating capacity for the grand opening.
Misrepresentation/Inaccurate Advice
Professional liability insurance can protect service providers in the event that their services don’t pan out as intended. This is largely relevant for consultants and advisors, but can be utilized by all sorts of service providers.
A marketing consultant is hired to advise a small retail business. Their contract projects a high return on investment (ROI). After implementing the consultant’s plan, the results are underwhelming and the business sees a marginal increase in sales. The business owner can sue the consultant for the relative loss.
Negligence
A big part of professional liability insurance is protection against alleged or actual negligence on the part of the insured. This can be some of the most serious and expensive claims.
For example, an architectural engineering firm designs a skyscraper, but fails to consider up-to-date building codes for some of the designs and it compromises the building’s safety, as well as violating the law. The pursuant claim could cost the firm anything from tens of thousands to several million dollars, depending on the severity of the negligence.
What’s Not Covered?
Coverage does not include criminal prosecution, nor a wide range of potential liabilities under civil law if they are not specifically included in the policy. These include:
- Bodily injury or property damage
- Fraudulent acts
- Employment matters
- False advertising
- Patents and trade secrets
- Invasion of Privacy (release of PII)
