Why You Can’t Afford to Not Have Professional Liability Insurance

At some point, most businesses are involved in some type of legal dispute, be it over an alleged physical or property damage to a third party or financial injury to a competitor, client or vendor.

And you’d surely want an insurance backstop in case you are targeted, to help pay for legal costs and any settlements or judgments. The type of liability that your business is going to face will depend on the type of work that you do.

If you’re in a service trade, the chances of your work causing someone physical damage or harm are remote, but you could still be sued for not living up to your part of a contract or if your services caused a client to lose money.

The costs of defending against a lawsuit of that type could quickly mount, even if you come out victorious in the end. Those costs would have to be borne out of pocket if you didn’t have the appropriate insurance.

The costs of not carrying professional liability insurance in many services trades can be a disaster to your finances as a lawsuit can catch you by surprise, even for work that you may have done years ago.

 

The unfunded lawsuit

Here’s a scenario that could leave you scrambling for funds. You run an engineering firm and a manufacturer sues your business after one of the machine parts that you designed failed, causing one of the client’s machines to seize up, resulting in $58,000 in damage to the machine and production downtime.

The lawsuit accuses your firm of negligence. Your business could be facing serious financial hardship as the suit asks for the cost of repairs and the lost production.

Here’s what you’re looking at:

  • Attorneys’ fees – Depending on where you live, these can range from $150 to $400 an hour, or more if you go with a topflight law firm.
  • Court expenses – Fees for copying, filing and other miscellaneous tasks all add up.
  • Other legal fees – You may need to call expert witnesses, as well.
  • Damages or settlements – Even if you try to reach a settlement with your client, they may opt to take the case to trial in hope of winning the full amount of the damages they are claiming.

 

You can see how the costs can quickly mount and if it gets to a damages or settlements stage, the costs will increase significantly.

You should know too that even if the case was frivolous, you’d still have to pay attorneys to defend it and file motions to have it tossed out of court. That alone could run you at least $5,000 in legal fees – a lot of money to pay out of pocket.

In fact, the U.S. Small Business Administration estimated in a recent study that legal costs for litigation ranged from $3,000 to $150,000, and only one-third of small business owners reported spending less than $10,000.

And there can be other fallout, as well. Perhaps word has gotten out about the lawsuit, damaging your reputation and ability to attract new clients and retaining existing ones.

And if one client has sued, others who may have held off and had similar experiences could also file suit.

 

Professional liability insurance

Insurance could have saved you from these significant expenses. The coverage, which is relatively inexpensive, is what’s known as “claims-made” coverage.

That means your policy must be active when the alleged incident occurred and when the claim is filed, in order to receive your benefits.

Client allegations that your work caused them a financial loss are often covered by a professional liability policy.

Professional liability insurance can cover errors and oversights with your work, as well as legal fees and the cost of settlements or judgments.

Cost: The average yearly cost of professional liability insurance for a small business, regardless of the limits chosen or the industry of the business, was $985.49 in 2015, according to the Insurance Information Institute. The median was $758.00.

As Risks Rise, You Need a Commercial Umbrella

As a responsible business owner you no doubt make sure that you are properly insured for any liabilities resulting from damage to other parties.

Imagine some of the following scenarios:

  • What if a visitor trips and falls at your business, breaking a leg and are unable to work for a few months while they recover?
  • What if a customer suspected of stealing later proves his innocence and sues for defamation of character?
  • What if one of your employees, driving a company truck, rams into a passenger car severely injuring some of the occupants?

 

The costs of a large financial settlement could surpass the primary liability limits of your existing insurance policies, leaving your business responsible for the rest of those costs. And a high-cost accident or lawsuit could potentially put your company out of business.

To avoid any of these scenarios, it’s wise to carry a commercial umbrella policy, which will essentially pick up where your primary insurance leaves off – or runs out.

All of your policies have limits. Once those limits have been breached, the other party can sue and go after your firm’s assets. Breaching those limits is getting easier due to the increasing prices of vehicles as well as health care costs, should the other party suffer physical injuries.

An umbrella policy will also cover you for liability for which there is no primary insurance, or when a primary policy includes an exclusion that the umbrella policy doesn’t.

 

Unfurling the umbrella

An umbrella policy will kick after limits are breached for:

  • Commercial general liability (bodily injury, property damage, personal injury, defense costs and attorney’s fees, limited contractual liability).
  • Business owners liability
  • Business auto liability
  • Employer’s liability

 

Most umbrella insurers require you to purchase primary insurance coverage before selling you an umbrella policy – for example, general liability insurance, auto liability insurance, workers compensation or employers liability insurance.

Umbrella policy limits may range from $1 million to $10 million, depending on the policy and the insurance company underwriting the policy.

 

Excess liability

For companies in business that have potentially higher liabilities, can secure an excess liability policy that kicks in after the umbrella policy is breached.

This coverage provides extra liability limits over an umbrella policy. This coverage typically follows the terms of the first underlying insurance policy.

Higher limits may be necessary for businesses with high loss potential, high profile, sizable sales, numerous assets, large auto fleets, worldwide presence, and/or significant public exposure.

If you have any questions or would like to speak to a professional advisor, please contact ACBI Insurance at 203-259-7580.