Frequently Asked Questions

What is professional liability insurance?

Professional liability insurance protects a person and/or an entity (corporation, LLC, LLP, partnership, etc.) against claims made by third parties (clients, patients, customers, etc.) arising out of the professional services provided. These professional claims normally allege negligence when a dispute arises as to whether one failed in his or her professional duties.  What constitutes negligence is often ambiguous, but negligence can be loosely defined as the failure to provide the degree of knowledge, care or skill of the average professional peer, in good standing, under similar circumstances. Essentially, anyone or any firm that presents as an expert in a particular field can be held responsible for their work, their advice, and their counsel.

Professional liability insurance is also often referred to as “malpractice insurance” “errors & omissions” or “E&O" insurance. Which term is used depends upon the type of professional services being discussed. For instance, medical professional liability insurance is most often called medical malpractice insurance. Likewise, attorneys and law firms often talk about legal malpractice. When talking about consultants, one often uses the term errors & omissions or E&O insurance.

Historically, professional liability insurance was designed for what are often referred to as “learned professions”—doctors, lawyers, CPAs, architects, engineers, etc. These are professions that require an advanced academic degree, licensing, etc.  In recent years, however, the scope of professional liability coverage has broadened significantly. It now includes pursuits such as business management or marketing consultants, technology consultants, software designers and engineers, Internet service providers, public relations experts, environmental consultants, mental health or substance abuse counselors, and yes, even insurance agents and brokers. The list, in fact, is virtually limitless, as almost anyone who claims to be an expert in a field, and is compensated for his or her expertise, can be held liable for their professional advice.

My firm is incorporated (PC, LLC, LLP, etc.). Why do I need insurance?

We are not attorneys and nothing appearing on this website is intended as legal advice. Creating a limited liability entity such as a corporation usually provides little, if any, protection against a professional liability claim. Professional services and advice are provided by a person, and while setting up the firm as a corporation or LLC/LLP may be an excellent idea from an accounting or general business standpoint, should a professional liability claim is made, the claim will name the individual(s) as well as the entity.

For example, many physicians operate as professional corporations (PCs) or similar entities. If you were to visit your doctor and he or she were to misdiagnose you, you would file a malpractice claim against the doctor. The corporation did not commit the error; the doctor did. So in a case like this, if you were to file a medical malpractice lawsuit, your attorney would name both the doctor and his or her corporate entity, since the entity often controls assets such as accounts receivable, etc. This same scenario would apply to any attorney, accountant, architect, engineer, or consultant.

Then why bother incorporating?

Corporations, limited liability companies, limited liability partnerships, and similar entities can provide excellent protection from routine business liabilities. From a tax standpoint, they also may allow more favorable management of income and expenses. These matters should be carefully discussed with an attorney and an accountant. Whenever possible, your professional liability insurance should be written to protect both the individual and the entity, since the entity often holds assets like accounts receivable, real estate, etc., and these assets need to be protected from professional liability claims.

If our contracts are properly drawn up, won’t that protect us?

Once again, we are not attorneys and this common question is a legal issue best discussed with your attorney.  In general, while a properly drafted contract is an excellent step, contract language can only do so much. If you present as an expert in a particular field and you get paid for your expertise, you are probably going to have trouble convincing a judge or jury that you can’t be held responsible for the advice your client paid for. Again, the hypothetical doctor above could hardly expect to avoid liability for his or her misdiagnosis or surgical blunder by having a patient sign a form limiting the doctor’s liability to his/her fee.

Contracts and retainer agreements are always a good approach (and in some instances they are required by law or regulation), since they outline the terms of the engagement and avoid misunderstandings. But contracts alone are not sufficient to protect you.