How does professional liability insurance work?

Professional liability insurance helps protect you against claims of negligence, malpractice and serious errors or omissions in your work. When you purchase a policy from an insurance company, it typically outlines the following details:

• Coverage limits: This type of policy typically has a claim limit, a maximum amount paid per claim and an aggregate limit or the total amount able to be paid for all claims during the policy period. The claim limit is the amount of coverage available for a single claim, such as $500,000. The aggregate limit is the maximum amount your insurance company will pay during the policy period, regardless of how many claims you have.
• Deductible: A deductible is the amount of money you must pay out of pocket before your professional liability coverage starts to cover a claim.
• Exclusions: Exclusions are the items that aren’t covered by your policy. For example, if a claim arises from criminal activity, such as intentional wrongdoing, your insurance company may refuse to pay.

Claims-made vs. occurrence policies

A professional liability policy typically has claims-made coverage. This means the covered event and the claim must occur while the policy is active. With claims-made coverage, an insurer typically pays all claims made during the policy period, even if the claim isn’t filed for months or even years after the covered event.

This can apply to inaccurate tax filing as well. For example, if an accountant makes a mistake on a client’s 2025 tax return, the client doesn’t have to file a claim right away. They might not find out about the error until the IRS has a chance to review the return and send a notice. If the accountant’s policy is still active and includes prior acts coverage or excludes retroactive dates, their insurer may pay even if the client doesn’t file a claim until 2026 or 2027.

Occurrence policies cover incidents occurring while the policy is active, even if the claim isn’t filed until after the policy period ends. For example, if your policy period ends on March 31, 2026, your insurer will pay any claims filed in 2027 as long as the incidents occurred while your policy was in effect.

Occurrence policies are generally less common in professional liability cases due to the resulting long-tail risk and unforeseeable settlement costs.

Tail coverage

Tail coverage is an add-on to your claims-made coverage, extending the claim period but not the policy period. For example, it allows you to report claims after your claims-made policy ends, provided the incidents occurred while your policy was still active.

Tail coverage is important if you’re selling your business, retiring, switching insurance companies or starting a new career, as it extends the time you have to report a claim.

Retroactive coverage

In some cases, it’s possible to get a retroactive professional liability insurance policy. This is a claims-made policy that covers incidents occurring before you purchased the insurance. The retroactive date is the earliest date of service covered by your new policy.

For example, if you purchase a policy with a retroactive date of November 1, 2024, it will cover an incident that occurred on November 3, 2024, but it won’t cover an incident that occurred on October 31, 2024.

If you want your insurer to cover a claim, it must be reported during the policy period.

What professional liability insurance covers

Professional liability insurance covers claims for professional errors, mistakes, errors in judgment or service failures. Here are two examples:

• Project delays: If you forget to approve project work, the project might be delayed, costing your client extra money. Professional liability insurance covers this type of service failure.
• Professional negligence: For example, a Financial Advisor may guide a client to invest in a single stock, making their portfolio vulnerable to market conditions and potentially resulting in financial harm. Professional liability insurance covers this type of claim.

Professional liability insurance generally covers damages caused by your actions, but it also covers damages related to actions you didn’t take. For example, if a lawyer doesn’t inform their client of information affecting their case, their professional liability policy would cover any resulting claim.

Note that liability insurance doesn’t usually cover criminal prosecution or events that aren’t explicitly listed in your policy. It’s also important to understand that your insurer will only cover an error or omission if it’s determined to have been negligent.

Professional liability insurance cost

Several factors affect the cost of professional liability coverage:

• Coverage limits
• Business type
• Location
• Industry/professional risk
• Claims history
• Deductibles
• Business revenue
• Number of individuals covered

For example, if your business is located in an area with higher-than-average legal expenses, you may have to pay more for liability insurance than a business owner in an area with lower-than-average legal expenses. Additionally, new businesses tend to pay more than established ones, as there’s more risk for the insurer.

While your professional liability insurance costs can fluctuate based on those factors, you may be able to reduce your costs by:

• Maintaining a clean claims history
• Choosing a higher deductible
• Keeping detailed records of your work
• Selecting realistic coverage limits
• Maintaining continuous coverage
• Bundling your liability coverage with other types of insurance

Who needs professional liability insurance?

Certain professionals, such as physicians and attorneys, are required to carry professional liability insurance. You should consider obtaining professional liability insurance if you’re an engineer, a real estate agent, consultant, marketing professional, information technology (IT) contractor or designer. Professional liability coverage may also be helpful for solo practitioners and small-business owners who offer professional services.

Several factors influence the need for this type of insurance:

• Contract requirements
• Risk exposure
• Industry regulations

Additionally, some jurisdictions require professionals to carry liability insurance even if others do not. Consider working with an insurance broker to determine if your city, county or state has any insurance requirements you must meet before providing professional services.

Key components of a professional liability insurance policy

Professional liability policies typically cover monetary losses and the costs of defending yourself against a lawsuit. For example, your insurer may cover the cost of hiring an attorney, obtaining records related to the claim and paying expert witnesses to testify on your behalf.

Professional liability insurance also covers the cost of legal settlements. If your case settles instead of going to trial, your insurer may pay the plaintiff, provided the claim isn’t the result of any excluded activity. Common exclusions include intentional acts and bodily injury claims.

Unlike general liability coverage, your policy limits may be reduced by your defense costs. This is common with burning limits policies, where defense costs and expenses, such as attorney fees, are subtracted from your policy.

Differences between general liability and professional liability insurance

General liability insurance typically covers physical losses, such as injuries and property damage. Professional liability covers financial losses due to errors, omissions and other risks related to providing professional services.

Another major difference between the two types of policies is that general liability insurance doesn’t cover professional negligence, which involves giving incorrect advice or failing to meet professional standards. Professional liability insurance does cover this.

Benefits of professional liability insurance for small businesses

Professional liability insurance protects businesses against lawsuits arising from alleged negligence or misrepresentation, which is vital when mistakes can cause financial harm to clients. This type of insurance also ensures business continuity by covering lost earnings when a business can’t operate due to a lawsuit. For example, a professional mistake could lead to a lawsuit resulting in a payout and legal fees that halt operations.

Overall, professional liability insurance ensures a business can continue operating when faced with unexpected legal challenges.

How to choose the right professional liability insurance

Choosing the right policy is important, so consider discussing your needs with an insurance agent before you sign up for coverage. An insurance professional can help you compare policies and determine which one offers the right balance of coverage and affordability.

Before you meet with an insurance agent, think about the risks inherent in your business. You may also want to look for a policy with these features:

• Crisis event expense coverage to manage any negative publicity associated with liability claims
• Pre-claim assistance, which may help resolve potential claims without counting against your policy limits
• Worldwide incidents (for businesses with global operations)

Filing a professional liability insurance claim

To initiate a claim, contact your insurance agent or inform someone from your insurance company. Your agent may recommend the following steps:

• Submit a claims form with client details, relevant dates and a summary of the allegations.
• Document the incident thoroughly. Include contracts, correspondence and documents to support your claim.
• Limit direct communication with the claimant (the client alleging that you’ve made a mistake). Refer any questions to your insurance company.
• Consider consulting a legal professional for guidance.

Additional coverage options

Additional coverage can provide enhanced protection beyond what’s included in your standard liability policy. Here are four types of additional coverage to consider:

• Cyber liability insurance: This type of insurance protects you from technology-related risks, such as hacking incidents and data breaches.
• Business owners policy (BOP): BOP insurance combines property coverage with general liability insurance, providing comprehensive coverage.
• Data breach insurance: If you lose a customer’s personal data or someone accesses one of your systems without authorization, data breach insurance covers the resulting losses. For example, your policy might pay to notify everyone affected by the breach.
• Commercial auto insurance: This type of insurance covers injuries and property damage arising from accidents involving company vehicles.

Frequently asked questions about professional liability insurance

When should you buy professional liability insurance?

Consider buying professional liability insurance before you take on your first client. Even a new business needs protection against the claims that can arise in the course of providing professional services. Additionally, claims-made insurance only covers events occurring while a policy is active. Purchasing this type of insurance early on ensures you have coverage when you need it most.

Do I need professional liability insurance if I already have a business owners policy?

A BOP combines several types of coverage, but it doesn’t cover errors, omissions and other mistakes resulting in financial losses, so it’s generally recommended that you have a separate professional liability policy. BOP coverage includes general liability insurance, business income insurance and commercial property insurance. Business income insurance protects your company from financial losses in the event that you have to shut down temporarily due to a natural disaster or another covered event.