Professional Liability Insurance: A Big Deal for Your Small Business
Heads up! If you own a service business but don’t have professional liability insurance, you’re missing a critical part of your insurance portfolio.
There are almost 30 million small businesses in the United States, according to the Small Business Administration (SBA). Those small businesses employ about half of the working population, and those 58 million or so people work mostly at firms with fewer than 100 employees.
Around 15 million of them are self-employed.
Small businesses are growing, and they’re essential to the future of employment. But small businesses are exposed to risk in a way that far too many owners do not realize until it’s too late. If you own a service business but don’t have professional liability insurance, you’re soaring on a risky trapeze without a net below you.
OK, I’ll Bite. What Is Professional Liability Insurance?
Professional liability insurance is sometimes called “errors & omissions coverage,” and it’s intended for any business that provides a professional service that is subject to a perceived standard of care and, if it fails to meet that standard, is then at risk of a negligence claim. So, if your business provides a service, and someone could claim — whether it’s true or not — that you were negligent in the performance of your service, then you need professional liability insurance. If you are sued, this insurance will cover the damages you could owe as well as your legal defense costs, even if the allegation proves groundless.
Sounds Important, but Isn’t That What My Business Liability Insurance Is For?
Probably not. It’s common for businesses to purchase general liability insurance, often to appease a requirement from a lender, landlord or vendor. Most general liability insurance policies are designed for claims alleging bodily injury, such as a person slipping and falling at your place of business, or claims alleging your business caused physical damage to tangible property belonging to someone else. General liability insurance also may cover specific types of advertising and personal injury liability claims.
General liability insurance does not cover a professional liability exposure, and it’s not as common for a small business to be required to purchase professional liability insurance or show proof of it to another party.
Give Me Examples to Help Me Understand
Consider these examples of professional liability exposures involving three of the most common small businesses in the U.S. They help illustrate the importance of this type of insurance.
Bookkeeping Professional Liability Exposures
• An ongoing error in a payroll calculation causes a client to be sued by a disgruntled employee.
• Penalties resulting from errors on tax filings or insurance company audits cost a client big bucks.
Computer Repair Professional Liability Exposures
• Software used to remove malware corrupts the client’s computer and sends a virus through the client’s network. This infects customers’ computers. Not only must the client spend significant amount of money to notify all of its contacts of the and results in expensive notification costs, the client losing customers, and reputational damage.
• Installation of a new hard drive on client’s network server wipes out stored client data, resulting in the client losing customers and incurring expensive data recovery costs.
Website Design Professional Liability Exposures
• Customer account information is improperly collected and not properly encrypted, causing customer data to be compromised.
• Website security is not properly arranged, exposing it to vulnerabilities and causing it to crash for extended periods of time, resulting in lost prospects and customers for the client. Notice the commonalities among the examples we’ve shared:
1. These scenarios are quite possible and indeed have already been encountered by some small business owner somewhere.
2. The resulting problems are expensive to fix. 3. None of these exposures would be covered by the business’s general liability insurance policy.
So, How Does Professional Liability Insurance Work?
Your professional liability insurance policy is designed as a funding source for two potentially major expenses: first, damages you owe, and, second, your legal defense costs.
Your policy’s terms, coverage and exclusions will be specific to your type of business. Your policy likely will include a deductible, and it also will include a limit — for example, $1 million — that you may be able to increase for additional money. The cost of your legal defense is normally considered part of the limit of insurance in a professional liability insurance policy. This differs from general liability insurance, which usually pays defense costs in addition to policy limits.
Here’s what would happen: Say your professional liability policy has a limit of $1 million. Someone brings a lawsuit against your company alleging damages of $1 million, and the court decides to award that claimant the full $1 million.
The cost of your legal defense was $200,000, so that sum is deducted from the limit of your policy. That means your policy will cover only $800,000 of the damage award, leaving your business on the hook for the remaining $200,000. This important difference between professional liability and general liability limits means you must take great care when selecting your limit of insurance.
Why Doesn’t Every Service Business Have Professional Liability Insurance?
Well, it’s not usually a mandatory coverage, and many business owners either don’t know about it or they choose not to purchase it. As a smart business owner who has professional liability insurance, you can use that to your advantage when marketing to prospects. Your company is a better risk than your uninsured competitor. Plus, you may find that having professional liability insurance gives you access to a broader scope of customers, including those that do require proof of such insurance.
Am I a Professional?
Even if you’re not a CPA, lawyer, architect, engineer or medical professional, you still may need professional liability insurance. It’s also for contractors, health and wellness consultants, real estate and financial professionals, software or IT developers and marketing professionals. Here’s the bottom line: If you provide a service, you need professional liability insurance.