Professional Malpractice Insurance

April 13, 2006

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Among the types of insurance available to small businesses, you may have overlooked this one. Perhaps you associate the term "malpractice" only with doctors or lawyers. The fact is, however, that malpractice insurance isn't just for doctors and lawyers anymore.

This type of insurance is actually called a variety of names: malpractice insurance, professional insurance, and errors and omissions protection. Regardless of the name, the coverage is designed to help you manage the risks associated with making a costly mistake while advising, or serving, a client.

For example, suppose you worked as a computer programming consultant and committed an error that caused a client to lose valuable data. A professional insurance policy could cover the costs of the client's losses.

If you provide advice or services to the public where significant liability could result if something went wrong, you may want to consider obtaining professional insurance for a couple of reasons. First, depending on your profession, you may be required to carry such insurance by law. Second, certain policies will provide you with low-cost legal representation in the event you are sued. Remember: even if your work is flawless, a customer could still claim that you did something wrong. A good professional insurance policy would help you defray the costs of any lawsuit, regardless of whether the underlying claim has merit.

When we plugged the term "malpractice insurance" into an Internet search engine recently, we found this sampling of occupations for which some form of professional insurance is available:

accountants
attorneys
advertising agencies
computer analysts
consultants
data processors
dentists
doctors
financial planners
notaries
occupational therapists
real estate agents

We don't have space to provide a detailed discussion about the intricacies of purchasing professional insurance in each and every field. However, here are some general principles to keep in mind as you explore your options:

Most policies do not, as a rule, cover intentional wrongdoing. If you — or an employee — intentionally harm a client or a client's property, you will most likely be on your own.
Some policies include attorney services in the event you are sued, but some do not. Because the costs of defending even frivolous malpractice claims can be substantial, it pays to get this added protection if it is available.
Not all mistakes are discovered at the time they are made. In fact, it may take years before a computer programming error, or piece of bad financial advice comes to light. For this reason, pay particular attention to the time period covered by your policy. One policy may, for example, only pay on claims filed while the coverage is in effect. If you get this kind of policy, you'll have to maintain it for a number of years after you go out of business. Another, usually more expensive policy may be tied to when the alleged mistake is made. Be sure that you get the type of coverage best suited to your business.
Malpractice insurance is not a license to be careless. Remember that the level of protection you get is limited to your policy's maximum. Big mistakes can result in damages that greatly exceed such policy limits leaving you, or your company, potentially liable for the difference.

Your trade association, business group, or union may be able to provide you with information about coverage available in your line of work. In fact, such groups often negotiate with insurance carriers to provide their members with protection at reduced rates.

You may also be able to get some background on companies that provide coverage for your industry by searching the Internet. A good start would be to submit a query to Google or Ask for the terms "malpractice insurance" or "errors and omissions insurance" + your occupation. For example, try running "errors and omissions insurance" + notary.