Why $2M is the new minimum for professional liability insurance

The rising cost of professional liability insurance claims

One small error.

Or an unfounded allegation from a dissatisfied client.

That’s all it takes for Canadian professionals to get wrapped up in an expensive and lengthy legal battle.

While $1 million in liability protection may sound sufficient, the reality is this amount doesn’t stretch nearly as far as it once did.

At a minimum, Canadians who provide professional services or advice should have a $2 million limit when it comes to professional liability insurance, which is also known as errors and omissions, or E&O, insurance.

Let’s break it down.

Increasing legal costs can quickly erode professional liability limits

If a client claims you’ve made an error that has cost them money, you’ll need to go on the defensive. This means hiring a lawyer who can help you navigate the lawsuit.

Experienced Canadian lawyers charge up to $600 per hour for their counsel. While this rate is more common in larger urban centres like Toronto, Calgary and Vancouver, mid-market and smaller cities can see hourly lawyer rates up to $400 per hour.

Now factor in that lawsuits of this nature can take 12 to 15 months (or longer) to resolve as lawyers file documents, review contracts, bring in expert witnesses and more to help the judge reach a verdict.

It’s easy to see how quickly legal fees can add up.

And that’s just your legal fees.

Settlements or awards will further pull from your professional liability insurance limit.

Even if you haven’t done anything wrong, or you had a minor role in a project, you can still be named in a lawsuit. Sufficient coverage is a must — you don’t want to be paying out of pocket to clear your name.

Increasing costs are driving up claim amounts

Everything in life has gotten more expensive, which is impacting:

• settlements (this is a common avenue for those who want to avoid lengthy legal proceedings)
• awards (the amount you’ll need to pay the plaintiff if the judge rules in their favour)

Let’s use an example of a mechanical engineer to illustrate how rising costs can quickly add up.

Work has started on a project when it’s discovered there are errors in the engineer’s drawing.

The project is stopped.

During the delay, the cost of materials increases due to the economic climate (i.e., inflation, supply chain disruptions, tariffs). This causes the project to go over budget.

The client sues the engineer, seeking compensation for the money they’ve lost due to the drawing error, including business interruption and increased material costs.

Remember, every time a client hires you, they are taking on a level of risk.

So, it’s no surprise that businesses are increasingly demanding higher professional liability limits from the professionals they hire. Your clients want to know that, if you make a mistake that costs them money, you’ll be responsible for that financial loss.

4 ways to determine professional liability insurance limits

It might be tempting to choose a lower limit for professional liability insurance because the premium will cost less.

But trying to save a little bit on your premium can cost you greatly in the event of a claim.

Here are four key considerations when choosing a limit for professional liability insurance:

1. Consider $2 million as the minimum limit for professional liability insurance.

Remember, legal fees add up quickly, regardless of your profession or industry.

2. Look at what your professional association or regulatory body requires.

If you have a professional designation, see what your regulatory body or professional association specifies as the minimum professional liability insurance limit needed for your area of expertise.

3. See what your client requires.

Carefully review the contract to see if your client has set a minimum limit for professional liability insurance.

Also keep in mind that a higher professional liability insurance limit can make you more appealing to clients. This signals that their financial interests will be protected in the case of a mistake.

4. Choose a higher limit if you work in a high-risk industry.

Some industries are just riskier.

From oil and gas to nuclear, aviation and many other sectors, one small slip-up can result in massive losses. This may warrant opting for an even higher professional liability limit, like $5 million.

The right professional liability insurance limit will help you rebound

Professional liability insurance FAQs

Julio Gonzalez, Client Advisor with EasyCover by Acera Insurance, answers three questions about professional liability insurance.

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Julio Gonzalez is a Client Advisor with EasyCover, a division of Acera Insurance that specializes in providing online professional liability insurance. He has worked in commercial insurance for more than 10 years, nearly seven of which he has specialized in professional liability insurance. You can reach Julio at 403.520.7206 of jgonzalez@easycover.ca.

Related Reading

• Ultimate Guide to Errors and Omissions Insurance
• Choosing the Right Policy Limit for Liability Insurance
• The difference between commercial property and liability insurance

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