The majority of professionals in the United States do not understand professional liability insurance or the rationale behind it. Many professionals do not carry a policy and see no reason to buy one. They do not realize that one lawsuit can result in the loss of everything they have worked so hard to attain.

Professional liability insurance, also known as malpractice insurance, is designed to protect professionals in service- or advice-giving fields from lawsuits. These policies help defend the policyholder from claims of negligence and help cover any awards. A general liability insurance policy covers direct harm but not negligence and is not adequate protection for most professionals.

If a professional does not have malpractice insurance and is sued for negligence, he or she will be responsible for the full costs of fighting the lawsuit and settling any judgments that are awarded. Depending on the profession and the specific claim, these costs may run into millions of dollars. The result is often bankruptcy and financial ruin for the professional who was sued, even if the lawsuit is found to be groundless. Defense costs alone can be enough to bankrupt many professionals.

Malpractice insurance prevents this. A policy indemnifies the policyholder against any claims of neglect made during the policy period. Many policies also cover errors or omissions made during the conduct of business. Coverage is provided only for the period for which the policy is in effect, but actions taken during that time frame are covered until the applicable statute of limitations expires. Malpractice insurance does not cover criminal prosecution.

There are additional types of civil liability that can often be added to a professional liability insurance policy. These include slander, libel, breach of warranty, breach of contract, cost of contract, personal injury and intellectual property. These policies naturally cost more, but the peace of mind they provide is often worth the additional expense.

Many different professions can be covered by malpractice insurance. Medical professionals, including nurses, are the first that come to mind. They are not the only ones, however – attorneys, consultants and financials brokers also need insurance. Other professions that benefit from this insurance include psychologists, counselors, social workers, accountants, general contractors, plumbers and the like.

Certain professionals are required to purchase malpractice insurance in most states but others are allowed to opt out if they choose. Policy premiums vary widely from one state to another and also vary by profession and benefit level. Doctors pay a lot more for their insurance, for example, than the average small business owner. Premiums for most non-physicians generally start at around $1,000 per year for one million dollars worth of coverage per claim. Given what’s at stake in a lawsuit, it is a small price to pay.

Robert Stewart writes about financial planning, investments and liability insurance for professionals.

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