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What is Insurance for Professional Liability
Insurance for professional liability is a form of commercial insurance that protects employees, directors, officers, as well as the entity itself, from financial loss driven by a monetary demand, lawsuit, or other form of financial recourse due to services offered to the person or entity bringing forth such liability. It is also referred to as Errors and Omissions Insurance (E&O Insurance) and Professional Indemnity Insurance (PI). Insurance for Professional Liability is offered in various countries around the world and can be mandatory for certain industries driven by regulatory requirements. In various instances, investors, customers, or suppliers, may require a business to purchase Insurance for Professional Liability in order for them to shield themselves from errors and omissions done by the management of such business.
Insurance for Professional Liability will be different from one industry to another in terms coverage and cost. For example, professional liability insurance for franchisors, which is a form of franchisor insurance, will read very differently than professional liability insurance for fund managers, which is a form of financial institutions insurance. This is simply due to the fact that every business within every industry has a specific set of services they offer to customers, and professional liability insurance must therefore be tailored to such services. In fact, the policy wording will define professional services and such definition must be reworded to include the specific services offered by the insured. Moreover, there are 3 sections of the professional liability insurance policy that are important to be reworded in order to ensure relevant protection is afforded to the business:
- The insuring agreement, which is the section of the professional liability insurance policy wording that outlines the explicit coverage granted to an insured.
- The Definitions section, which lists various definitions within a professional liability insurance policy wording including Wrongful Act and Professional Services, which are the main definitions based on which the services of the business are covered.
- The Exclusions section, which lists various items that will not be covered by a professional liability insurance policy.
This content is independent of any content coming from insurance brokers, insurers, law firms, or insurance lobbyists. Commercial insurance is rarely taught in schools, and when it is, it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Insurance for Professional Liability, like many other topics in commercial insurance, due to bad habits acquired through over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has both an operational aspect and a legal aspect, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects your organization right and pays out fast on large losses).
Professional Liability Fund
A professional liability fund can have one of several meanings depending on the intent and as follows:
- A fund that purchases and subsidizes professional liability insurance for its members;
- Professional liability insurance for an investment fund;
- A fund sponsored by an insured to self-insure the risk of professional liability risk, which is a form of liability risk.
Professional Liability Insurance Costs
The costs of professional liability insurance will vary greatly depending on the size and nature of the business being insured. Individuals such as contractors can pay hundreds of dollars for professional liability insurance whereas banks can pay millions of dollars. There isn't a rule of thumb on professional liability insurance costs, however it is prudent to budget around 2.5% of the limit of professional liability insurance as the premium to be paid annually.
Professional Liability vs General Liability insurance
There are two different forms of liability business insurance. Professional liability insurance protects against liability tied to the services offered by a business whereas general liability insurance, also known as commercial general liability insurance, protects against specific liabilities not tied to the services offered by a business (ex. bodily injury, advertising injury, etc.).