Professional liability insurance
Professional liability insurance, often referred to as indemnity insurance, is a vital type of commercial insurance that safeguards professionals and businesses against financial losses resulting from legal claims of negligence, errors, or inadequate performance in their professional duties. This insurance is particularly important for individuals in regulated professions, such as doctors, lawyers, and engineers, who are held to high standards of practice defined by law. Various forms of this insurance exist, tailored to specific industries; for instance, malpractice insurance is common among healthcare providers, while contractors may rely on contractors' liability insurance to cover project-related errors.
The coverage typically extends to legal costs, settlements, and any court-awarded damages up to the policy's limit, relieving professionals from the burden of potentially crippling financial liabilities. It not only protects the professionals but also ensures that clients or patients receive the compensation they are entitled to in cases of professional misconduct. In today’s digital age, many policies have also evolved to address emerging risks, such as data breaches and cyber-attacks. Overall, professional liability insurance is essential for anyone whose work involves providing specialized services or advice, helping to mitigate risks associated with the inherent uncertainties of professional responsibilities.
On this Page
Subject Terms
Professional liability insurance
Professional liability insurance, also known as indemnity insurance, is a type of commercial insurance coverage. It is designed to protect individual professionals, or entire businesses and all their employees, from financial losses arising from legal claims of negligence, errors, oversights, and inadequate performance of professional duties.
Many types of professional liability insurance are specific to the particular industries and activities they cover. For example, physicians typically carry a type of professional liability insurance known as malpractice insurance, while construction contractors carry contractors' liability insurance, and financial planners and investment advisers carry a type of liability policy known as errors and omissions insurance. Such policies are designed to supplement general forms of commercial liability coverage, and they are considered essential for any professional whose duties include giving advice to clients, patients, or customers, or providing skilled, specialized services.
Background
When a client, patient, or customer consults or retains the services of a skilled professional, that professional has a legal duty to perform those services to the best of their ability, and in accordance with established standards. In the case of regulated professions, which are professions that require the practitioner to hold a valid license, these standards are usually covered by detailed laws. Examples of regulated professions include doctors, lawyers, engineers, accountants, and real estate agents. For individuals or companies working in unregulated professions, performance standards typically have more generalized legal precedents, with specifics covered by the contracts and service agreements the professional enters into with the client, patient, or customer at the outset of their business relationship.
If the client, patient, or customer is dissatisfied with the professional's work or services, or if those services result in avoidable injury, loss of income or assets, or other adverse event, legal action can be taken against the professional. If the professional is found to be at fault, they will be responsible for providing the victim with financial compensation.
Without professional liability insurance, the professional would have to pay this compensation using their own personal resources. Since these types of court judgments can result in large sums of money being awarded to victims, the professional is at risk of being put out of business or facing financial ruin. Victims also face risks in such situations, as they may never receive the compensation they are owed because the professional is not able to pay it.
Thus, professional liability insurance protects the interests of professionals as well as their clients, patients, or customers. The insurance is designed to cover court costs, judgments, settlements, and court awards up to the maximum amount of money specified by the policy. This ensures that the professional does not have to meet any such expenses out of pocket, and that the victim will receive the full amount of compensation to which they are legally entitled.
Overview
Unlike general commercial liability policies, professional liability insurance is specifically designed to extend into the actual services provided by the coverage holder. For example, a person who suffered an injury after slipping and falling on an icy walkway outside a doctor's office would be compensated for their injuries under the doctor's general liability policy, but a person who suffered an injury as the result of the doctor's negligent treatment would not. This is because the health services provided by the doctor are beyond the scope of general liability policies, which are intended to cover everyday risks that are common to virtually all businesses.
In some professions, indemnity insurance is mandatory and must be carried at all times. In cases where it is optional, insurance brokers and agents strongly advise professionals to carry it. Professionals working in both regulated and unregulated industries commonly face lawsuits, and they must be financially prepared to defend themselves, regardless of whether the claim has any valid basis.
Professional liability insurance for doctors is also known as malpractice insurance, or medical liability insurance. It covers physicians for unnecessary or improperly performed treatments that harm the patient, as well as medical advice that proves not to be in the patient's best interest. Some policies also cover doctors whose professional conduct is subject to peer review. Physicians and medical specialists accused of malpractice may have the claims evaluated by a neutral, third-party panel of experts to determine whether the doctor acted negligently in the case at hand. In such cases, the policyholder can receive compensation if an improper peer review judgment results in loss of income or harm to the professional reputation of the insured.
Contractors' liability insurance is used by construction professionals to cover errors and oversights during both the design and execution phases of a particular project. These policies also usually extend to other professionals hired by the contractor to complete specific tasks, such as electricians, plumbers, or engineers. Beyond covering repair or rebuilding costs, contractors' liability insurance may also cover the policyholder for environmental damage caused by their professional negligence. Contractors' liability insurance policies can also be configured to cover all work performed by the contractor on an ongoing basis, rather than just covering one particular project.
Errors and omissions insurance is used by lawyers, financial advisers, insurance agents and brokers, and other professionals working in industries that revolve around giving advice to clients. Even though clients of such professionals are normally required to acknowledge and accept responsibility for the inherent risks associated with such services, lawsuits are very common, especially in the financial services industry. Errors and omissions insurance protects professionals from liabilities arising from poor performance, misjudgments, oversights, and advice that damaged, rather than benefited, the client. It is also used by professionals such as engineers and architects to cover financial losses resulting from faulty designs or prototypes, defects, and delays in delivering a final product.
Generally, professional liability insurance does not cover criminal prosecution or claims that result from infringing on someone’s intellectual property. Car accidents, bodily injuries, and property damage are also not covered under most policies.
The rise of Internet technology created new risks for professionals whose duties include safeguarding client or patient information. In response to these new types of threats, many forms of professional liability insurance have been reconfigured to include cybercrime, cyberattacks, and other digital threats such as data breaches, data theft, identity theft, and the misappropriation of confidential client or patient information by temporary or permanent staff members. For example, cyber liability insurance may cover lost revenue, legal costs, customer notification, data recovery fees, and forensic investigations in the event of data breaches or other cybersecurity crises.
Bibliography
Bussani, Mauro, and Anthony J. Sebok. Comparative Tort Law: Global Perspectives. 2nd ed., Edward Elgar, 2021.
Fuller, G. “TU-A-206-01: Professional Liability Insurance - Protecting You and Your Practice.” Medical Physics, vol. 43, no. 6, 2016, p. 3740, doi.org/10.1118/1.4957440. Accessed 19 Dec. 2024.
Hayes, Adam. "What Is Indemnity Insurance? How It Works and Examples." Investopedia, 26 Feb. 2024, www.investopedia.com/terms/i/indemnity‗insurance.asp. Accessed 19 Dec. 2024.
Jackson, Rupert M., and John L. Powell. Jackson & Powell on Professional Liability. 9th ed., Thomson Reuters, 2022.
Kagan, Julia. "What Is Professional Liability Insurance? Costs and Coverage." Investopedia, 17 July 2024, www.investopedia.com/terms/p/professional-liability-insurance.asp. Accessed 19 Dec. 2024.
"Medical Malpractice Insurance." National Association of Insurance Commissioners, content.naic.org/insurance-topics/medical-malpractice-insurance. Accessed 19 Dec. 2024.
Pozgar, George D. Legal Aspects of Health Care Administration. 14th ed., Jones & Bartlett Publishers, 2023.
"Reduce the Risks for Your Business." Insurance Bureau of Canada, www.ibc.ca/stay-protected/protect-your-business/risk-management. Accessed 19 Dec. 2024.