Running a business comes with a number of necessary costs — one of which is an appropriate insurance policy. Insurance policies can be a significant expenditure for startup companies or SMBs, but they are essential protection in an increasingly litigious world.
Insurance offers peace of mind and may even turn into a saving grace for your business, but that’s no reason to pay inflated professional liability insurance costs. It is entirely possible to obtain comprehensive insurance coverage in an affordable way.
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What is professional liability insurance?
Professional liability insurance is also known as errors and omissions insurance (E&OI). It covers you if you make a mistake (or if a client thinks you made a mistake) in the professional advice that you gave them and have suffered financially as a result.
Professional liability insurance will cover both your legal fees and any possible compensation (up to a threshold determined by your policy) if a client sues you for negligence, misrepresentation, or for giving inaccurate advice.
Even if you haven’t made a mistake, you may still need to call on your professional liability insurance if a client decides to sue. Without insurance, you will need to find the money to fund your legal defense — and that can be prohibitively expensive.
How is a professional liability insurance cost calculated for SMBs?
For those outside of the industry, it can be difficult to know how the costs of your professional liability insurance add up. Understanding what factors an insurer is likely to take into account can help you plan your business to minimize costs.
Here are some of the factors that a potential insurer is likely to consider when giving you a quote:
It will come as no surprise that those in a high-risk industry are asked to pay higher insurance premiums. An industry might be considered high-risk if there are a significant number of adverse events. This might be due to poor regulation or because they relate to an activity with a strong chance of failure, such as venture capital investments.
Alternatively, an industry might be considered high-risk if an error is likely to lead to particularly damaging financial losses. This can be the case even if the probability of an error remains low. Architectural firms or financial consultants working with high net worth individuals may fall into this category.
Your loss history
Just as it would with auto and home insurance, making a claim on your professional liability insurance is likely to lead to higher premiums in the following years. This can often be the most contentious aspect of an insurance quote and many SMB owners feel that this is unfair — especially if their claim was the result of a vexatious complaint.
Unfortunately, the chances of an insurance company moving on this issue are slim, and you may have to accept higher costs for a period after a claim. You may be able to mitigate these increases if you can demonstrate procedures and processes that you have implemented to reduce future risk.
The location of your business
It may surprise some SMB owners to realize that the location of their business can be a factor in their professional liability insurance cost.
This is partly due to the differences in regulations and court rulings in various jurisdictions. If your business is based in a state with weak regulation, you may find that your insurer perceives you as a higher-risk proposition. Similarly, if the courts in your state typically award higher compensation amounts, your insurance company will want to account for this in their policy calculations.
The larger your business, the more you are likely to pay for professional liability insurance. Simple probability means that larger companies will cost more in terms of insurance payouts. There are three main components to this.
Having more employees increases the risk that one of them falls below the required standard. As a result, the cost of your insurance will typically increase as you hire more staff. You may find that some hires, such as recruiting a head of compliance, can reverse this trend. You may also want to provide evidence of employee training procedures as this may help ameliorate some of the risks.
A greater number of clients also increases the probability of a lawsuit coming your way. Similarly, a higher turnover, even in the absence of increased staffing or more clients, implies that a claim will be more expensive, leading again to higher premiums.
You may be able to limit the increase in premiums associated with business growth by demonstrating that you have invested more in training, compliance, and processes than before.
Knowledge and experience
One piece of really good news is that you are rewarded for your experience within your industry.
There are many ways to demonstrate your knowledge and experience. These can include membership of a professional body, years in business, and leadership roles within your industry.
How can a PEO help with cost-effective professional liability insurance for SMBs?
How can a PEO help your business when it comes to Professional Liability insurance?
Some PEOs (or Professional Employer Organizations) not only provide worker’s comp and HR services for the business, they also provide leadership training and strategy meetings to help the business streamline and grow.
When you team up with a PEO, you increase your professional toolbelt as a business owner and can reduce the risk of E&O claims occurring.
Get in touch with the MartinoWest team today and let’s create a customized PEO bundle for your SMB.