Professional liability insurance: Overview, definition, and example
What is professional liability insurance?
Professional liability insurance, also known as errors and omissions (E&O) insurance, is a type of insurance policy that provides coverage for professionals and businesses against claims of negligence, errors, omissions, or inadequate work in the services they provide. It protects the insured party from financial losses arising from lawsuits or claims alleging professional misconduct or failure to meet standards of care.
For example, a consulting firm might purchase professional liability insurance to cover claims that their advice caused financial losses for a client.
Why is professional liability insurance important?
Professional liability insurance is important because it provides financial protection against the risks associated with delivering professional services. It covers legal defense costs, settlements, or judgments, helping professionals and businesses avoid significant financial burdens resulting from lawsuits.
For businesses, having professional liability insurance is often a requirement to secure contracts or comply with industry regulations. It also enhances credibility and trust with clients, demonstrating a commitment to accountability and risk management.
Understanding professional liability insurance through an example
Imagine an architect designs a commercial building, but an error in the blueprints leads to construction delays and increased costs for the client. The client files a lawsuit against the architect for negligence. If the architect has professional liability insurance, the policy would cover legal defense costs and any damages awarded, up to the policy’s limits.
In another example, a financial advisor provides investment advice that results in unexpected losses for a client. The client claims the advisor failed to adequately assess their risk tolerance and files a lawsuit. The advisor’s professional liability insurance would cover the legal costs and any settlement amounts, protecting the advisor’s personal and business finances.
An example of a professional liability insurance clause
Here’s how a professional liability insurance clause might appear in a contract:
“The Contractor shall maintain professional liability insurance with a minimum coverage amount of [specified amount], covering claims arising from errors, omissions, or negligence in the performance of professional services under this Agreement. The Contractor shall provide a certificate of insurance upon request.”
Conclusion
Professional liability insurance is an essential safeguard for professionals and businesses, protecting them from financial losses due to claims of negligence or inadequate performance. For businesses, maintaining this coverage enhances credibility, ensures compliance with client and regulatory requirements, and provides peace of mind in high-risk industries. Clear contractual clauses outlining insurance obligations ensure transparency and accountability in professional relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.