Five questions to assess professional liability risk

Here's a surprising statistic: in our experience more than 80 percent of our clients with professional exposures fail to buy or are declining professional liability insurance along with their business owner's policy (BOP) or commercial package policy (CPP).

While there have been significant changes to the ways businesses interact with customers over the last 15 years — from the birth and explosion of social media to a burgeoning "consulting" class — many businesses have been slow to recognize their professional risks. Some simply choose not to buy it, mistakenly believing their general liability policy will cover their professional service risks.

Professional services create risk

So, who needs professional liability (also known as errors and omissions (E&O)? Short answer – an increasing number of small businesses. These questions can help identify potential vulnerabilities and the need for professional liability coverage:

Assessing the need for professional liability risk:

  1. Does the business perform any consulting work, training or provide any advice for customers?
  2. Is the business involved in work requiring special licenses?
  3. Does the business design, recommend, install or test products?
  4. Has the business had any customer allege non-performance of products or services?
  5. Have any customers withheld payment due to a contract dispute?

A "yes" answer to any of these questions indicates the business would be best protected by adding professional liability protection to their insurance program.

Here are just a few scenarios of when this coverage would have protected the professional and the business:

  • Wedding planner who ran out of food halfway through the reception.
  • Local hardware store thats demo resulted in a customer damaging his house.
  • Software developer whose code was hacked.
  • Retirement adviser whose consultation caused a client to lose 10 percent of her life savings.
  • Interior designer who ordered the wrong materials, delaying the project.
  • Travel agent booking the wrong type of accommodations for honeymooners.
  • A public notary whose expired stamp prevents an adoption from going through.
  • Nutritionist whose program failed to help a client lose weight as implied.
  • Real estate agent who provides incorrect information about a listing.

The most expensive cost of liability insurance? Not having any.

It is more important than ever for small business owners to understand the tremendous need to carry professional liability insurance. As many as 52 percent of all civil lawsuits target small business professionals. In today's highly litigious world, small business owners simply can't be without this coverage.

The fact is, with annual premiums typically costing between $500 and $1,500 for a small business owner, professional liability coverage is certainly less expensive than a lawsuit. A study done by the Institute for Legal Reform found a frivolous lawsuit can cost from $2,000 to $5,000 in legal fees alone, well more than the cost of protection.

Real professional liability scenarios and outcomes

A beauty salon trainee performing laser hair removal without supervision injured a salon client during the treatment. As a result of the procedure, the customer sustained first and second degree burns on his back. Because the salon's professional liability policy included coverage for bodily injury that arises from the rendering of professional services, the settlement was completely covered.

A realtor, as a property listing agent, failed to disclose to a claimant-buyer that a termite inspection report showed termite damage to three walls of a house. While the claimant had received an earlier termite inspection report that showed infestation to one wall of the house, he claimed he would not have purchased the house for $475K, and must now tear down and rebuild the house. The estimated cost to repair the termite damage at $160K was fully covered with professional liability protection.

What do these situations have in common? They're examples of small business owners who clearly needed and benefited from adding professional liability coverage to their standard policies.


The Hanover’s Professional Advantage offers broad protection for a wide range of personal, business, and professional service providers.


Chip Hamann photo

About the author

Chip Hamann serves as The Hanover's small commercial chief underwriting officer. In this role, he leads a team responsible for determining the underwriting strategy, state management, product and point of sale offerings. He also oversees the field underwriting teams. He and his team partner with actuarial, product, technology, corporate underwriting and marketing to continually assess and evolve The Hanover's underwriting strategy and best practices to help position The Hanover as a carrier of choice for agents in small commercial.

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This material contains suggested guidance and is provided for informational purposes only. It does not guarantee any particular outcome and is not intended as an endorsement of any of the entities mentioned therein.