How does professional liability insurance protect US businesses?

Unhappy clients can cost firms dearly, especially if they sue

How does professional liability insurance protect US businesses?

Professional Risks

By Mark Rosanes

Although not always legally required, having professional liability insurance is essential for many businesses, especially for those that provide expert or advisory services.

Customer satisfaction is vital to the success of any business. However, mistakes do happen and having unhappy clients can cost a company greatly, particularly if those clients decide to sue.

This is where professional liability coverage comes into play. Also known as errors and omissions (E&O) insurance, this type of policy protects businesses against claims of financial losses resulting from alleged or actual negligence during the fulfillment of a professional service. It covers legal and settlement costs arising from service-related mistakes and oversights, breach of contract, unfinished work, and budget overruns, among others.

Who needs professional liability insurance?

Any individual or business that offers professional services or advice to clients should take out professional liability coverage. The list includes:

  • Accountants
  • Architects
  • Consultants
  • Engineers
  • Financial advisors
  • Graphic designers
  • Information technology (IT) specialists
  • Insurance professionals
  • Legal professionals
  • Medical practitioners
  • Real estate professionals
  • Software developers
  • Stylists
  • Tradespeople
  • Wedding planners

When is professional liability coverage required?

Businesses in certain industries are required, either by law or industry standards, to take out professional liability insurance. Some clients may also require a professional or a company to have this type of coverage in place before agreeing to do business. These are some of the professions where coverage is necessary:

  1. Medical practitioners

Medical professionals, including physicians, nurses, dentists, psychologists, physical therapists, and other healthcare providers, are required by law to carry medical malpractice insurance. This type of professional liability insurance protects them against claims of negligence resulting in a patient’s injury or death.

  1. Lawyers

Currently, legal malpractice insurance is mandatory only in two states – Idaho and Oregon. Nearly half of all US states, however, have adopted some form of disclosure rules requiring lawyers to notify clients whether or not they carry coverage.

  1. Real estate professionals

Taking out errors and omissions insurance is compulsory in several states, including Colorado, Idaho, Iowa, Kentucky, Mississippi, Nebraska, New Mexico, North Dakota, Rhode Island, South Dakota, and Tennessee. Requirements, however, vary between states. In Colorado and Nebraska, for instance, real estate agents are required to get a policy with a minimum annual aggregate limit of $300,000. In Iowa and Mississippi, meanwhile, the minimum limit is $100,000.

  1. Insurance agents

Several states also require insurance agents to carry errors and omissions coverage. Similar to those for real estate professionals, each state has a different set of requirements. In Rhode Island, agents and brokers need to have coverage with a minimum aggregate policy limit of $500,000. In Tennessee, the minimum limit is $100,000.

  1. Government contractors

Under the Federal Acquisitions Regulations, businesses working on government projects are required to carry professional liability insurance to protect them from “the perils to which the contractor is exposed.” These businesses include:

  • Construction firms
  • Professional services providers, including financial and public relations firms
  • IT specialists, including consultants and cybersecurity experts
  • Transportation and logistics services providers
  • Pharmaceutical and healthcare services providers

What is excluded from professional liability coverage?

Professional liability policies do not cover legal or medical expenses resulting from bodily injury or property damage that customers suffer while a service is being provided, which are covered by general liability insurance.

Lawsuits filed by employees due to accusations of wrongful termination or workplace harassment are likewise not covered by professional liability insurance. For these, businesses need to take out employment practices liability coverage.

How much does professional liability insurance cost?

Several factors impact the premium prices of professional liability coverage. These include:

  • The industry and the risks associated with it
  • Where the business is located
  • Coverage limits and deductibles
  • Years of operation
  • Number of employees
  • Past claims

According to Insureon’s data, the median cost of professional liability premiums is $59 per month or about $713 annually. The firm adds that more than half of its small business clients allocate between $500 and $1,000 each year for errors and omissions coverage. About a fifth spend less than $500.

How does professional liability insurance protect businesses?

Different businesses also get varying levels of protection from professional liability insurance. Here are the types of coverage this policy provides for different professions.

Service provider

What insurance typically covers


Legal and settlement costs resulting from bookkeeping errors, missed items on a client’s tax return, failure to submit a client’s tax return on time, accusations of professional negligence, and other professional mistakes

Architects and engineers

Legal and settlement costs resulting from advice and design errors and oversight, breach of contract, and allegations of negligence

Financial consultants and investment managers

Lawsuits resulting from miscalculation and poor advice on stocks, mutual funds, and other investments leading to financial losses for the client

Insurance agents and brokers

Legal defense and settlement costs stemming from claims of poor advice on insurance coverages and policies


Lawsuits arising from mistakes made when providing legal services to a client, breach of contract or professional services, and allegations of misrepresentation

Medical professionals

Claims of negligence resulting in a patient’s injury or death

Real estate agents and brokers

Claims arising from incorrectly describing a property in a listing – including not disclosing structural flaws – and failure to execute fiduciary duties to clients

Tradespeople (carpenters, electricians, painters, plumbers, and heating and air conditioning technicians)

Expenses incurred to repair or redo a trade contractor’s faulty work, and any legal costs incurred from lawsuits, settlements, and damages resulting from these errors


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