Businesses that provide professional services are bound to make mistakes. Professional indemnity insurance can help protect you from financial losses resulting from those mistakes.
Read on to learn what professional indemnity insurance is, why it’s important, what it covers, how much it costs, and who needs it.
What Is Professional Indemnity Insurance?
So what is indemnity insurance and why does it matter?
Professional indemnity insurance (also known as errors and omissions, E&O, or professional liability insurance) helps pay for legal and settlement costs if someone accuses your company of negligence or making a business mistake.
For instance, let’s say you have a pest control company and you neglect to tell a client that your insecticide could be harmful to pets. The customer could sue you if their pet got sick because of the treatment.
Why Is Professional Indemnity Insurance Important?
Professional indemnity coverage is essential for businesses that provide professional services, as it protects business owners from paying out of pocket to defend their company in court or pay judgment or settlement costs if they are found at fault.
Lawsuits can be costly (not to mention bad for your reputation), and if you don’t have the savings to cover legal expenses or pay for damages, they can potentially bankrupt your business.
What Does Professional Indemnity Insurance Cover?
Now that we know what professional indemnity insurance is and why it’s important, let’s look at what it covers.
Work mistakes can include making errors or providing inaccurate information in your professional services. For example, if you manufacture a weight loss tea but accidentally print the wrong recommended dosage on the label, you could face a lawsuit from customers who get ill because of the mistake.
While it can be challenging to predict what the future will hold, those whose profession it is to provide advice need to be extra cautious about the guidance they give. For instance, if a real estate agent advises a homebuyer that the house they want to purchase is in good condition, and then it turns out that it has a structural flaw, the client could sue the agent for giving bad advice.
Negligence is when your failure to provide essential information or services causes another person harm. For instance, if a yoga teacher fails to warn her class not to attempt a pose unless it is a regular part of their practice and one of her attendees gets injured, they could sue the teacher for negligence.
A customer can take you to court if you miss a deadline and cause them to lose money. For example, if a contractor doesn’t finish a storefront in time for their client’s grand opening, the business owner could sue for lost revenue.
Breach of Contract
A client can sue you if you fail to deliver on the promises you made in a contract. For instance, let’s say you run a publishing company and contract with an author to publish their novel, but your cover designer quits midway through the project. If you can’t finish the project, the author could take you to court for breach of contract.
What Professional Indemnity Insurance Doesn’t Cover?
While professional indemnity insurance covers legal fees and settlement costs arising from mistakes or negligence, there are some situations that it doesn’t cover.
Business Property Damage
Professional indemnity coverage can’t help if the property you run your business out of is damaged due to events such as fire, storms, or vandalism. Commercial property insurance is a better bet to protect against property damage, and can also cover work materials or equipment stored within your business property.
Professional indemnity insurance doesn’t cover financial losses if an employee steals money or inventory from your company. Commercial crime insurance is a good choice to protect your business from losses due to employee theft or burglary in general.
Third-party damages are losses that someone incurs due to your business. The costs associated with third-party damages can include medical expenses or the costs of repairing or replacing damaged property. General liability insurance can help pay legal defense fees and protect you from paying out of pocket for bodily injury, property damage, or personal injury (reputational harm) costs.
Professional indemnity coverage won’t help pay for employee injuries. Most states require employers to maintain workers’ compensation insurance to help pay for employees’ medical expenses, lost wages, or disability benefits caused by a work-related illness or injury.
What Does Professional Indemnity Insurance Pay For?
Professional indemnity insurance helps pay for costs associated with claims of negligence, breach of contract, bad advice or inaccurate information, missed deadlines, and business mistakes.
Professional indemnity coverage can help pay for:
- Legal expenses–including attorney retainer costs and court administrative fees
- Settlement costs–what you must pay the accuser if you agree to settle out of court
- Judgment costs–what you must pay the plaintiff if they win their case against you (sometimes the court will award a summary judgment without having to go to trial)
How Much Does Professional Indemnity Insurance Cost?
Professional indemnity insurance costs depend on several factors, including your industry, location, coverage limits, number of employees, and claims history.
You might find yourself wondering, “How much professional indemnity insurance do I need?” The answer to that question depends on your industry and business risk level.
For instance, professional indemnity insurance for doctors will likely cost more than coverage for a gardener, as healthcare workers are at risk of making a mistake that could harm a patient or getting sued for medical malpractice (when a patient receives other than the standard level of care).
Insurance costs also depend on your insurer. We looked at professional indemnity insurance costs from three top insurance providers to get an idea of the average cost.
The Hartford: Between $500-$1,000 per employee, per year
Next: Between $25-$45/month
Who Needs Professional Indemnity Insurance?
Any small business or sole proprietor that offers professional services or gives advice should consider purchasing professional indemnity coverage, including:
- Healthcare workers
- Financial advisors
- Insurance agents
- Real estate agents
- Tradespeople (plumbers, electricians, carpenters)
- Tax preparers
- Digital marketing agencies
- Beauticians and hairdressers
- Interior designers
- IT consultants
- Software developers
- Graphic designers
- Event planners
- Child care providers