People often think of professional liability insurance as something only doctors and lawyers need. The truth is that anyone in any profession can be sued for making bad decisions.
Standard business general liability insurance policies do not cover liability for professional mistakes. They will not cover errors that cost someone else money without causing bodily injury to them or destroying their property.
Occupations that may not at first blush be considered “professions” may still be at risk of lawsuits for acts they have or have not committed. Here are some examples:
- An ebook publisher issues a collection of short stories. The editor is unaware that one of the stories had been previously published in an online magazine, which still holds the rights to it. The magazine publisher sues the ebook publisher for copyright infringement.
- A developer of customer relationship management software customizes a system for a large client. The system includes several plug-ins, one of which contains a few lines of code that exploit vulnerabilities in the client’s network. The network is hacked, resulting in substantial costs for notifying customers, credit monitoring, and penalties. The client sues the developer.
- Prior to granting a mortgage on commercial development, a lender asks a property appraiser to determine its value. The purchaser of the property goes bankrupt a year later, and the lender forecloses. The lender learns that the property’s value is well below the figure the appraiser determined; selling the property will not recoup the amount of the mortgage. The lender sues the appraiser for the error.
- A website publishes several photos of a prominent politician in intimate embraces with a person who is not that politician’s spouse. The politician’s friend sues the website for invasion of privacy.
- An interior designer, planning a new wing for a hospital, orders more than $100,000 worth of workstations, chairs, tables and other furniture. The person placing the order makes a typo when entering the tables’ product number. The tables that arrive do not fit the space. The designer must order new ones, resulting in extra expense, a delayed opening for the wing – and a lawsuit.
- Owners hire a contractor to renovate an old building that they plan to use for a new microbrewery. The project’s cost initially stays under the contractor’s estimate. But, the owners find that the capacity of the water filtration system is less than the contractor promised. The system has to be upgraded at an additional cost of $30,000. The owners sue the contractor.
- A loan broker makes several commercial equipment loans on behalf of one finance company. The company finds out that half of the loans did not meet its lending guidelines. Some of them become non-performing, and the lender seeks $300,000 from the broker for the unpaid amounts.
All kinds of businesses can be sued for their mistakes. Even if they acted appropriately, they still must hire lawyers to defend themselves. For these reasons, professional liability insurance, more commonly known as errors and omissions (E&O insurance), can be vital to the survival of their operations.
E&O insurance can cover the cost of defending your company in a civil lawsuit and certain damages awarded, even if the legal action turns out to be groundless.
E&O insurance is required by law in some areas for certain kinds of professional practices, especially medical and legal, where it is more commonly called malpractice insurance. This type of protection is not part of your general liability insurance or homeowner’s insurance.