Updated: Oct 7
Insurance is one of those things that’s critically important to running a successful small business, but it’s not always clear what type of insurance you need.
One common misconception is to think all you need is generic “business insurance.” But “business insurance” is actually an overarching term that applies to a range of insurance policies, from general liability to professional liability.
Almost every business needs general liability insurance. This “slip and fall” insurance provides coverage for third-party claims of property damage, bodily injury, and personal and advertising injury.
But what about professional liability insurance? Do you need that, too?
We’ll make it easy for you: yes. Most businesses also need professional liability insurance coverage.
For the longer answer (that’s just as easy, we promise), read on. We’ll explain what professional liability insurance is, how it protects your business, and why you need it.
What is professional liability insurance?
If you’re familiar with errors & omissions (E&O) insurance, you already have a good idea of what professional liability insurance is. E&O insurance is another name for professional liability insurance because it describes the activities that common claims covered by this type of insurance come from.
Professional liability insurance protects your business from costs arising from negligence claims that resulted in a financial loss for third parties, like your clients and customers. Let’s break that down:
Negligence claims could describe an error you made, or something you forgot to do (in other words, an omission).
Costs include any damages you’re found responsible for, as well as the company investigating the claim and handling your defense, should you need one.
Finally, the third parties describe anyone other than you and your managers and employees. This could be the public at large or anyone that your business does, well, business with.
Now that we have the official definition out of the way, let’s talk about the types of accidents that professional liability insurance was designed to protect—and how this coverage might apply to your business.
What does professional liability insurance provide?
Professional liability insurance provides coverage for the investigation of claims of negligence, your associated legal defense, and any settlements arising from those claims. Here are a few examples of what that might look like:
When someone sues you for negligence in your professional activities, they’re claiming that a professional error you made, whether you made a mistake or you forgot to do something, resulted in a financial loss for them. In professional liability claims, negligence can be actual or alleged.
Let’s say you run a small design agency and you’re designing a website for one of your clients. If you fail to deliver the designs by the due date and your client is unable to launch their new website before the holiday, they may claim they lost out on potential sales due to your mistake.
Legal defense costs
Unhappy clients can be prone to sue. When that happens, you’ll need a lawyer to defend the claim. Professional liability insurance provides the legal defense related to your claim.
Claims and damages
If you are found legally liable, either after the investigation by the insurer, or as a result of a judgment by a court, mediator, or arbitrator, professional liability coverage can help pay those damages.
If the delay by your design agency is found responsible for the website client’s lost sales, professional liability insurance can help pay amounts you owe them.
What types of businesses need professional liability insurance?
Many people think of professional liability insurance as insurance for “experts.” They’re not wrong. This type of insurance is designed to protect professionals in cases where they’ve been negligent in the course of their work, whether they made an error or an omission that led to financial loss.
It’s common for experts like physicians, attorneys, dentists, consultants, freelancers, and accountants to carry this type of insurance — but don’t let the word “expert” fool you.
If you operate a small business, you’re representing to your clients and customers that you’re an expert at what you do, whether you’re a pet groomer or a handyman. Clients trust that you know what you’re doing, and the services you provide will be professionally carried out.
When a mistake happens, or when a client perceives a mistake to have happened, they can sue you for negligence. That’s why professional liability insurance is considered essential insurance for almost any kind of business.
That’s right: professional liability insurance can provide some protection even if it’s not your fault.
That bit about a client “perceiving” a mistake to have happened? It wasn’t a typo.
Professional liability insurance provides coverage for claims of both actual and alleged negligence. You may be thinking, “If I’m not found negligent, why would I need coverage?” Let us explain.
Rarely is life so simple as a client sues you for negligence and realizes the next day they were wrong and drops their claim. Even if you’re not found liable, you’ll need an attorney to defend you. There could be other costs, too, such as associated court fees and those related to the investigation of the claim. Your professional ability insurance coverage can provide these.
Professional liability also helps you win more work.
Clearly, professional liability insurance does a lot to protect your business. But it’s not just there to help you avoid major costs.
Professional liability insurance can also be a valuable asset to your business. If your small business primarily serves other business customers, having professional liability insurance coverage can actually help you win more business.
That’s because having active professional liability insurance coverage demonstrates that you take your business seriously. When you’re backed by insurance, it helps your clients trust you. As a small business, that trust can mean the difference between a client selecting to work with you, or your competitor.
Okay you’ve sold me. Now, how much does it cost?
Professional liability insurance coverage sounds pretty great, right? There’s more good news. It’s also affordable. You’ll have your choice of insurance providers to shop from. Plus, some allow you to bundle your professional liability coverage with general liability for even more savings.
The ultimate cost of professional liability insurance depends on a few things, including:
What type of small business you own — Different activities are covered depending on the typical claims associated with your line of work. For instance, a plumbing company will carry different risks than a private tutoring business. This helps keep premiums accurate for your business, because you’re not paying for coverage you don’t need.
Where your small business is located — Businesses located in cities can have higher premiums than those located in more rural areas.
How many employees you have — Each employee working for you increases your risk. You’ll want to be covered whether you were the one who made a mistake or it was someone working for you.
The coverage limit you select — Insurers will offer different liability limits, such as $1 million or $2 million. Depending on your industry, your business may inherently carry more risk and or the type of clients you have require higher coverage limits.
An insurer will ask these questions to give you a base price for your policy. If you’d like to get a quick quote for general liability insurance and professional liability insurance coverages, you can get one here in 60 seconds or less from our friends at Thimble. They’ve designed the most flexible professional liability for small businesses out there.
Professional liability insurance and your small business
Protecting your business with professional liability insurance is a smart decision for any small business owner, whether you’ve just set up shop in your garage or you’ve expanded into several brick-and-mortars and have dozens of employees.
Professional liability insurance can protect you from third-party claims of negligence (actual or perceived), and the defense and settlement costs associated with those claims.
There is so much to think about when you manage a small business. Professional liability insurance can ease one worry and allow you to focus on growing your business, knowing you're protected from the things work can throw your way.
Guest Authored by Terri Hitchcock, JD at Thimble
Terri is currently the Chief Insurance Executive at Thimble Insurance, and was previously a Principal and Director of the product design practice area with Perr & Knight, a major insurance consulting services firm. Her areas of expertise are reinsurance and insurance operations, contracts, compliance, product development, and underwriting, having provided such services to clients in the industry over the past 30 years.Terri graduated with a B.A. in English and French from the College of the Holy Cross. She received her JD from the University of Maryland School of Law.