What Is Professional Indemnity Insurance?

Professional indemnity insurance is common among professionals and service providers. It protects against claims of financial loss due to a failure to meet your profession’s standard of care.

Professional indemnity is also called professional liability, malpractice, or “errors and omissions” insurance. It typically covers negligence, errors, omissions and other mistakes you may make that could financially harm a client. This type of policy helps pay for your legal defense and any settlements or judgments you must pay, subject to the limits of the policy.

In general, indemnity insurance “indemnifies,” or compensates, someone else for losses or damages. Professional liability is a kind of indemnity insurance.

Certain professions have known liability exposures and corresponding coverage, such as medical malpractice insurance for doctors and nurses and legal malpractice insurance for attorneys. Architects, engineers, financial advisors, consultants and accountants also typically need professional liability insurance.

But virtually anyone who provides a service could find themselves defending a liability claim if they fail to meet a client’s expectations, miss a deadline or deliver a substandard work product. For example:

• A commercial landscaper may install the wrong plant species.

• A graphic designer may make a mistake in a marketing brochure.

• A florist might fail to deliver the right arrangements for a big wedding.

In each of these cases, there could be damages that result in an errors and omissions claim.

Any time you do not meet the standard of care exercised by a reasonable person in your profession facing the same or similar facts and circumstances, you run the risk of a liability claim. Professionals who are licensed and have a fiduciary duty are especially vulnerable to claims. In many cases, a liability policy for these professions will include coverage for breach of fiduciary duty, lack of regulatory compliance or negligence.

Some types of claims aren’t covered. These include intentional and dishonest acts, general liability (such as slips and falls), employment practices liability, cyber liability and faulty workmanship. Policies also might not cover a breach of contract. All policies have deductibles and limits.

The difference between professional liability and general liability

An important distinction to remember is that commercial general liability (CGL) insurance doesn’t pay for errors and omissions claims. Professional liability is excluded from CGL policies.

CGL covers bodily injury, property damage, medical expenses, and personal and advertising injury claims when someone other than an employee is harmed as a result of a business’s operation. For example, a customer might get injured on your premises or an employee could accidentally damage a customer’s property. Most CGL claims arise from physical damage, but CGL also covers copyright infringement, accidental use of another person’s intellectual property, misleading advertising claims, and libel and slander.

While a business owners policy (BOP) provides sole proprietors and small employers with several types of coverage in one policy, it doesn’t include professional liability. You’ll need to purchase professional indemnity insurance separately or add it to the BOP through a policy endorsement.

Policy considerations

There are several things to consider when purchasing professional liability insurance. You must decide how much coverage you need and how claims are to be paid. The amount you should purchase depends on your profession and the type of work you do, as well as your firm’s location, the number of employees you have, your annual revenue, and your claims history.

Policies are sold with limits, the maximum the policy will pay out. There are two kinds of limits: occurrence limits and aggregate limits. An occurrence limit is the most the policy will pay for a single claim, and an aggregate limit is the most a policy will pay out during the policy term (usually one year). For example, a $1 million/$3 million policy would pay up to $1 million per occurrence and up to $3 million during a one-year period.

Most professional liability policies are written on a claims-made basis. Only claims made while the policy is in force are covered. Since an error or omission might not be discovered right away, you’ll need to continue your policy for an extended period. If the policy is no longer in force when the claim is made, the claim won’t be paid.

In some industries, your liability exposure may have a “tail” that lasts for years. Typically, professionals in these industries purchase an extended reporting period option, which protects against future claims if you cancel the policy.

Other considerations

Review your professional liability risk exposure with us. We can help you choose the limits and coverage that make sense for you. Here are a few questions to ask:

• Who pays for the policy? In some professions, employees are covered by their employers’ professional liability policy. For example, a nurse may be covered by a hospital’s insurance. However, these policies might not protect you as much as an individual policy, and the insurance company will likely put the employer’s interests above yours. For example, it may be more advantageous for your employer to quickly settle a liability claim rather than vigorously defend it on your behalf. Your employer’s liability policy also won’t cover you for any outside work or volunteer activities you perform.

• Is license defense included? If licensure is required in your profession, ask about license defense insurance. You may have to add it to your professional liability coverage. It pays your legal expenses if you must defend your license before your licensing board.

• What’s in the insurance contract? Check if the language in the insurance policy preserves your right to consent to a settlement. Also, beware of “hammer clauses.” These make you responsible for paying the difference if the insurer recommends settling at a lower amount, and you decide to go to trial.

• Does the insurer have experience in your industry? Choose an insurance carrier with experience defending liability claims in your profession. The insurer can provide expert witnesses to testify on your behalf.

Of course, the best defense is to avoid a claim altogether. You can lower the likelihood of a claim and reduce your premiums by following industry best practices. Instituting procedures to reduce errors, prevent negligence, review contracts and keep projects on schedule can go a long way toward eliminating costly liability claims.

No one wants to be sued for negligence or financial damages, but it happens all too often in our litigious society. Take the steps necessary to reduce your risk of a professional liability claim and get the coverage your business needs. We can help you find the right policy to give you peace of mind.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.

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