Professional Liability (E&O) Insurance: Who Needs It

What Is Professional Liability Insurance?

Professional liability insurance — also called Errors and Omissions (E&O) insurance — covers claims that arise from your professional services, advice, or expertise. If a client alleges that your work was negligent, contained errors, or failed to deliver promised results, this policy covers your legal defense and any settlements or judgments.

General liability insurance does not cover these claims. GL handles physical injuries and property damage. Professional liability handles financial harm caused by your professional services.

Who Needs Professional Liability Insurance?

If your business provides services, advice, designs, or specialized expertise, you need professional liability coverage. Industries where this is critical include:

• Consultants — Management, IT, marketing, and financial consultants
• Accountants and bookkeepers — Errors in tax filings, audits, or financial statements
• Architects and engineers — Design flaws, structural errors, or project failures
• Real estate agents — Misrepresentation, failure to disclose, or transaction errors
• Technology companies — Software bugs, system failures, or data loss
• Contractors — Design-build firms where professional judgment is part of the scope
• Healthcare providers — Medical malpractice is a specialized form of professional liability
• Attorneys — Legal malpractice coverage is required in many states

Even if your state does not legally require it, many client contracts mandate professional liability coverage before you can start work.

What Does E&O Insurance Cover?

A standard professional liability policy covers:

Negligence — Claims that you failed to perform your services with the level of care expected of a professional in your field.

Errors and omissions — Mistakes in your work product, missed deadlines, overlooked details, or incomplete deliverables that cause financial harm to a client.

Misrepresentation — Claims that you provided inaccurate information or made false promises about your capabilities or deliverables.

Defense costs — Legal fees, court costs, and expert witness fees. Even frivolous lawsuits cost money to defend. E&O covers these costs regardless of whether you are found liable.

Settlements and judgments — If a claim results in a financial settlement or court judgment, the policy pays up to your coverage limit.

What E&O Does NOT Cover

• Bodily injury or property damage — These fall under general liability
• Criminal acts or fraud — Intentional wrongdoing is excluded
• Employee disputes — Employment practices liability insurance (EPLI) covers those
• Contractual guarantees — If you guaranteed a specific outcome in writing, your insurer may deny the claim
• Known issues — If you knew about a problem before the policy started, it is excluded

Claims-Made vs. Occurrence Policies

Most professional liability policies are claims-made policies, not occurrence-based. This is a critical distinction:

• Claims-made: The policy covers claims filed during the active policy period, regardless of when the incident occurred (as long as it occurred after the policy's retroactive date).
• Occurrence: The policy covers incidents that occurred during the policy period, regardless of when the claim is filed.

Because E&O is typically claims-made, you need to maintain continuous coverage. If you cancel your policy and a claim comes in later for past work, you have no coverage. To bridge this gap, you can purchase tail coverage (also called an extended reporting period) when you retire or change insurers.

How Much Does E&O Insurance Cost?

Premiums vary widely based on:

• Industry and risk level — IT consultants pay less than architects
• Revenue — Higher revenue means higher premiums
• Coverage limits — $1 million per claim / $2 million aggregate is standard
• Deductible — Higher deductibles lower premiums
• Claims history — Previous claims increase rates significantly

Most small professional service businesses pay between $500 and $3,000 per year. High-risk professions like architects, engineers, and medical providers pay considerably more.

Choosing the Right Policy

When evaluating E&O policies, look at:

1. Retroactive date — The earliest date for which the policy covers incidents. An earlier retroactive date provides broader protection.
2. Coverage territory — Make sure your policy covers the geographic areas where you do business.
3. Exclusions — Read them carefully. Some policies exclude specific services or types of claims.
4. Duty to defend vs. right to defend — "Duty to defend" means the insurer must provide a defense. "Right to defend" gives them the option. Duty to defend is stronger.
5. Consent to settle — Some policies let the insurer settle claims without your agreement. If your reputation matters, negotiate a consent clause.

Reducing Your Professional Liability Risk

Insurance is a financial backstop, not a substitute for risk management:

• Use clear contracts that define scope, deliverables, timelines, and limitations of liability
• Document everything — Emails, change orders, meeting notes, and approvals
• Set realistic expectations — Never guarantee outcomes you cannot control
• Stay current — Maintain your licenses, certifications, and continuing education
• Communicate early when problems arise — Silence makes claims worse

The Bottom Line

If clients pay you for your expertise, judgment, or professional services, you need professional liability insurance. A single unhappy client can file a claim that costs tens of thousands in legal fees alone. E&O insurance ensures that one bad project does not destroy your business.