Professional liability insurance, also known as errors and omissions insurance, protects you from the financial consequences of lawsuits against your small business when the claim involves misrepresentation, negligence, or malpractice. It’s a crucial business insurance product to own as an entrepreneur or self-employed person. Facing a lawsuit due to a mistake you made could otherwise bankrupt your business if you aren’t prepared with the right policy.

Suppose you make a mistake or your deliverable didn’t meet your client’s expectations. In this case, your client might sue for damages. This circumstance is where professional liability insurance kicks in to cover your legal costs.

This post details the events that professional liability insurance covers and doesn’t cover. It further explains precisely what the policy pays for.

What does professional liability insurance cover and not cover?

Professional liability insurance protects any business owner or self-employed person from claims of negligence as a result of their professional services. Purchasers can range from accountants to hairdressers. Typically, you can expect protection from legal claims against you or your business for errors, omissions, or negligence occurring in your business’s regular conduct as long as the claim is within your policy period.

Related: Is errors and omissions the same as professional liability

The policy won’t cover lawsuits that general liability insurance covers. General liability insurance protects your business from claims related to property damage or bodily injury and for slander or libel claims.

So suppose someone visits your accounting office and slips in the main foyer due to a wet floor. In this case, your professional liability insurance wouldn’t pay for lawsuit costs and damage awards. Instead, your general liability insurance foots the bill.

Related: How much does professional liability insurance cost and who needs one?

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Further, criminal liability isn’t covered by any of these insurance policies. Cyber security liability will also need its own separate policy. Cyber liability usually surfaces when a hacker or virus causes a data leak or loss of digital assets that generate clients or customers harm which results in a legal claim.

Lastly, professional liability insurance won’t cover your employees’ work-related injuries or illnesses. Workers’ compensation insurance handles this.

What does professional liability coverage pay for?

Professional liability coverage firstly pays for legal defence costs. When a client sues, you’ll need a legal professional to defend against the claim. Lawyers easily cost between $300 and $1,000 per hour. The last thing you want is to foot these bills yourself.

In some circumstances, the court will order you to also pay for your client’s legal fees. So not only are you responsible for your own lawyer’s costs but also the opposing party’s legal fees. Again, professional liability insurance can cover this amount.

Your policy also pays for legal damages. If you are found liable for your client’s harm, they’ll expect compensation. This compensation can be for lost profits, consequential losses, and more. Your insurance covers these damages and the legal fees up to the policy limit.

Related: What Is Professional Liability Insurance and How Much Insurance Do I need?

Examples of situations that professional liability insurance covers

1. Missed deadlines
Clients have tight deadlines. They might need a graphic for next Friday to launch their new marketing campaign. Or, their website has to be up by the fifth of next month to prepare for a seasonal sales event.

If you’re a graphic designer or web developer, missing these deadlines can cause a substantial loss for your clients. As a result, they might sue you if your inability to meet the deadline causes them to delay executing their other plans.

Causing your client to miss their Black Friday sale could mean hundreds of thousands in lost profits. Without the proper insurance, the need to pay such damages could bankrupt you.

2. Mistakes and errors
A mistake or error has similar consequences to missed deadlines. Suppose the website you built doesn’t let shoppers finish their purchase. As a result, your client cannot make any sales for a week. In this situation, you may be responsible for their whole week’s worth of lost profits.

Again, having to pay such damages could cause a significant financial fallout. Don’t forget you would further be liable to legal costs. However, the right professional liability insurance can pay these fees on your behalf.

3. The client blames you
Lawsuits don’t only arise when you make a mistake. They also occur when a client believes you were negligent. This situation can require you to hire a lawyer to defend yourself. Even if you’re in the right, you’re still liable to legal fees unless you have the proper professional liability insurance.

Suppose the client doesn’t make their expected sales on their big discount event. They might point fingers and say that it was due to your graphics, which didn’t communicate the discounts properly. A legal claim can still leave you liable to lawyer fees and other court costs even if it wasn’t your fault.

Professional liability insurance covers costs associated with legal claims for misrepresentation, negligence, or errors or omissions in your business. It won’t cover every type of lawsuit, so it’s essential to understand what other policies you need to protect against business risks.

Related: Does professional liability insurance cover negligence?

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