Legacy Digest

Understanding Professional Liability Insurance And Why Your Business Might Need It

While almost every business needs general liability, there are many businesses for whom general liability insurance isn’t enough to properly protect them.

Many businesses will have a disagreement with a customer or business partner over a perceived mistake at work or professional error at some point, which could lead to a professional liability lawsuit.

While general liability is a critical coverage, it does not provide protection against errors and omissions you make in the context of your work as a professional. For that reason, many businesses need to obtain separate coverage for their professional liability as well.

Our team at Legacy Partners is committed to helping businessowners understand their insurance so they know what risks they face and how insurance can help protect against those risks. Here’s a detailed look at professional liability insurance, and how it helps protect your business.

Understanding Professional Liability Insurance

Professional liability insurance, often referred to as Errors and Omission (E&O) insurance, is designed to protect businesses when an employee makes a mistake in the professional services that they are providing to customers or clients. While we all like to think that we will never make mistakes, the reality is that we are all human and we all make mistakes sometimes.

If an employee makes a mistake that causes harm to a customer or client of your business, they can sue you for damages. Even if your business and your employee did nothing wrong, the cost for defending yourself against the claim or lawsuit can be prohibitively expensive. Professional liability insurance steps in to help cover the costs associated with these types of claims so you can sleep a little easier at night.

What Does Professional Liability Cover?

Professional liability insurance covers claims arising from errors, mistakes, or negligence in the delivery of professional services. This will be somewhat different in the context of any specific profession, as it can cover a wide variety of claims depending on the industry you operate in.

The legal basis for a professional liability claim often relies on “negligence,” that you had a professional duty which you failed to meet in the way you provided services to the client. However, it can also be based on a claim for breach of contract, asserting that you promised to deliver something but failed to deliver on that promise. In general, professional liability claims require someone to prove that:

• Your work did not meet industry standards, a client’s reasonable expectations, or requirements outlined in a contract.
• The client suffered some kind of damages or loss.
• These damages are directly related to the fact that your work didn’t meet professional standards.

Common Examples of Professional Liability Claims

There are a number of common claims scenarios which can help better illustrate the value of professional liability insurance.

• Medical Malpractice: One easy to understand example comes in the context of medical malpractice. For example, a patient goes to a doctor for treatment, and the doctor makes a mistake during that treatment which harms the patient. Doctors, therapists, pharmacists, and other similar professions are often required to carry medical malpractice insurance that will provide coverage if a patient claims a mistake was made in their care which caused them injury. Medical Malpractice insurance is just an industry-specific form of Professional Liability coverage.
• Simple Mistakes: Many professional liability claims result from simple errors by employees in the performance of their job duties. An engineer could make a mistake in a load calculation. An architect could make a mistake in a blue print. An interior designer could have a room painted the wrong color. A software designer could make a coding mistake which could be abused by hackers to access protected information. A pharmacist could compound a drug incorrectly.
• Missed Filing Deadlines: Some businesses represent clients where there are deadlines for filing. For example, an accounting firm may have to finalize and submit tax documents by a specific deadline or the IRS will impose penalties for a late filing. A lawyer may have to file an answer to a complaint or a motion by a certain date or the case will be dismissed.
• Quality Defects: Quality defects can also cause serious professional liability issues. For example, a manufacturer that promises to deliver a product within a specific set of tolerances but fails to do so, or a construction company that completes a building but cuts corners in promised quality of construction or materials, may be sued for these errors or omissions.
• Bad Advice: Often times these claims arise from simply offering bad advice. For example, if a consultant advises their client to pursue a particular strategy that backfires, the consultant may be liable for damages. A claim can even arise for an HR professional or placement firm if they recommend a candidate for the job who causes some type of specific harm to the company they are placed at.
• Manufacturing / Construction Delays: Another area where we commonly see claims is where a company fails to deliver on its obligations under a contract for the supply of merchandise or to complete construction by a specific date. If you fail to deliver a critical component to a customer, who then can’t complete assembly of its own products and lose out on sales, you could be liable. If you promised to complete a building by a specific date but end up years behind, you could be sued for professional errors for failing to live up to your promise.

Who Needs Professional Liability Insurance?

While the answer to this question can be very specific to the exact contours of your business, professional liability insurance is an important coverage that business owners who provides services to clients or customers, or deal with very specific design or manufacturing requirements, should strongly consider it.

This includes professions where you:

• Are required by the state or a licensing organization to carry the coverage
• Have to sign a contract that requires you to carry coverage
• Offer professional services directly to customers
• Regularly give advice to clients
• Have to meet specific design, production, or delivery requirements.

This can be a pretty expansive list, but there are many professions where we strongly recommend professional liability coverage, including:

• Doctors, Nurses, Caregivers, Therapists, Pharmacists and other Health Professionals
• Accountants and CPAs
• Advertising Agencies
• Architects and Engineers
• Contractors, Home Builders, and Other Construction Professionals
• HR Consultants and Staffing / Placement Agencies
• Interior Designers
• Lawyers
• Make-up Artists
• Manufacturers
• Personal trainers, fitness instructors, masseuses and physical therapists
• Professional consultants
• Real estate brokers and agents
• Software developers, Programmers, Web and UX / UI Designers, and other Technology developers and consultants

While this is just a handful of examples, there are hundreds of industries and professions that could benefit from professional liability. We encourage you to contact one of our agents to learn more about how it can benefit your business.

Do Manufacturers Need Professional Liability?

When people think about professional liability policies, they often overlook the risks faced by manufacturers when it comes to potential errors and omissions they can make. However, there is a specific type of professional liability policy tailored specifically to provide manufacturer’s errors and omissions coverage.

If your business provides professional manufacturing services, then a manufacturer’s errors and omissions policy can help cover your business for mistakes made in the delivery of those professional manufacturing services where a claim arises from any products you’ve sold, leased, created, assembled, licensed or distributed to others. This includes coverage for:

• Failing to manufacture products to perform to their intended function or serve their intended purpose.
• Defects in the manufactured products.
• Manufacturing products that fail to meet legal or industry standards regarding quality, safety, or fitness for purpose.
• Failure to provide warnings or instructions in connection with your manufactured products.

All of these types of claims and more can be covered by a professional liability policy that is designed specifically for manufacturers, known as a manufacturer’s errors and omissions policy.

Do Contractor’s Need Professional Liability?

While many contractors and construction professionals feel they do not need a professional liability policy, this could not be further from the truth. There is a specific professional liability policy tailored to provide contractor’s errors and omissions coverage. This can be custom designed to fit your needs, including coverage for things like:

• Faulty Workmanship: General Liability coverage may not be sufficient to pick up the full scope of errors and omissions caused by faulty workmanship, but professional liability coverage can help close the gaps and ensure there will be coverage when you need it.
• Design Errors: Design-builders have exposure from their role as the architect or engineer on projects, but often times general contractors get hit with lawsuits even where they weren’t responsible for these aspects and are forced to defend their role in the process.
• Failure to Supervise: General contractors also face lawsuits for errors caused by other contractors under the guise of lawsuits that allege they failed to properly supervise, inspect, or otherwise control the quality of workmanship provided by their subcontractors.

These claims are all fairly common in the construction industry and it’s important for construction professionals to carry a contractor’s errors and omissions policy to protect themselves against these claims.

What Else Do You Need To Know About Professional Liability Insurance?

If you’ve determined that your business would benefit from professional liability insurance, there are some important things you should know about these types of policies to make sure the one you purchase properly protects your interests.

Occurrence versus Claims Made Trigger

There are two types of triggers for insurance policies generally that determine when coverage is afforded under the policy, commonly referred to ask (1) occurrence and (2) claims made.

Occurrence

You are probably most familiar with occurrence based policies. In these policies, like most general liability policies, you have coverage based on when an event occurs. If a client slipped and fell in your parking lot on January 10, 2025, the carrier will look to see whether this took place during a specific policy period. For example, if your policy had effective dates from January 1, 2025 to January 1, 2026, then the claim occurred during the policy period, and coverage can be applied.

Claims Made

Unlike occurrence-based policies, most professional liability policies are not triggered based on whether the harm occurred during the policy period, but instead look to determine when a claim is actually made on the policy.

That is, a claims-made policy protects you against any claim you make during the policy period, regardless of when the alleged error or omission took place. This means that professional liability policies need to still be active and in force to report a claim and receive coverage.

Insurance companies are not usually willing to provide coverage for any and all past errors and omissions when they write coverage, so they have to insert a starting point into your policy. This starting point is known as the “Retroactive Date.” Claims arising from acts or services provided before the retroactive date are typically excluded from coverage, regardless of when the claim is made.

Thus, when adding, extending, or changing your professional liability coverage, you should always:

• Pay attention to the retroactive date on any quote you receive. If you’ve had continuous coverage, most carriers will let you keep that date in place. If you don’t keep the oldest date possible, you’re potentially giving up coverage for years of incidents that could later become claims.
• Seek to maintain continuous coverage. A gap in coverage, which can occur if you cancel a policy and don’t replace it at the same time, could mean you will lose your retroactive date.
• If you’re selling your business, or if you’re leaving your profession entirely, you may still later get hit with lawsuits or claims based on your previous work. In order to make sure coverage still exists, you can purchase what is known as “tail coverage” or an “extended reporting period,” which allows you to report claims for prior incidents for an additional time period after the claims made policy expires.

What Is Commonly Excluded From A Professional Liability Policy?

While professional liability policies can cover a broad range of professional errors and omissions, there are certain types of losses which are commonly excluded from these policies:

• Bodily Injury / Property Damage: This type of injury is usually covered by a commercial general liability policy.
• Intentional or Dishonest Acts, Fraud, and Misrepresentation: These exclusions are designed to prohibit claims that are the result of deliberate misconduct or fraud.
• Prior Knowledge: This exclusion operates to prohibit claims which the insured was aware of before procuring the policy. If you’re aware a mistake was made, it’s probably too late to insure against that particular issue. Insureds should disclose any known incidents or circumstances at the time of securing coverage to avoid later disputes.

Conclusion

Professional liability policies are extremely important for a lot of business owners. They can help cover up significant gaps in your other liability coverage by protecting you against a wide variety of claims for errors and omissions in the delivery of your professional services.

Even though most professions aren’t obligated to carry this insurance, it is a required component in many private contracts that companies will have with their customers. Regardless, we highly recommend you discuss the benefits of professional liability insurance with an agent that can help you review the risks you face to determine whether a professional liability policy makes sense for your business.

For personalized advice and comprehensive coverage options, contact Legacy Partners Insurance. As an independent agency serving our customers in Michigan and all over the United States, our licensed professionals are ready to assist you with all your insurance needs. Call us today to ensure your business is properly protected.