The reasons for professional liability insurance are woven into the fabric of most professions. If you need a reminder why professional liability insurance is important, just spend a couple of minutes with a commercial insurance agent who will be happy to regale you with anecdotes of the horrors of practicing uninsured. No doubt their tales will touch on protecting your personal assets from the ravages of litigation and providing peace of mind.
Then, if time permits, they may drill a little deeper and remind you of the benefit of providing a deep and secure financial well, upon which clients may draw if the unthinkable happens.
Professional liability insurance certainly provides many benefits. If a covered risk occurs, insurance provides a secure source of financial redress, which, in the best case, fully compensates the injured while preserving the business and the owner’s assets. So, for many, the issue is not whether to acquire professional liability insurance; it is weighing the cost and coverage.
Is there a downside to professional liability insurance? The simple answer is “no,” but there are negatives that don’t negate its viability; rather, they are potentialities that need to be understood and controlled. Before going further, I want to emphasis that these pitfalls are not a reason to avoid professional liability insurance, but issues to be considered and controlled.
Complacency. Practicing without liability insurance is like climbing El Capitan without ropes. It is dangerous. Just as a simple mistake can cause a climber to fall, a mistake made by a professional can cause significant economic liability. Insurance is like wearing a safety harness: It limits the risk of unintended consequences.
The pitfall is complacency. If you know a safety net is stretched beneath you, you risk taking chances that would otherwise be unthinkable. An insurance policy limiting downside risk can lull you into a laissez-faire attitude about quality control and compliance. Having a reasonable fear of doing things right can be compromised if you believe insurance can provide a safe harbor from overly aggressive tax positions. Like a tight-rope artist who will perform tricks with a safety net, their willingness to take the same risks are limited if the net is taken down. It is important to maintain adequate professional liability insurance and practice as though you are uninsured.
Limited Coverage. Even if you were able to read your insurance policy and understand the coverage limitations, you need to keep in mind that insurance companies are not in business to protect you; they are in business to make a profit. In the event of a claim, the insurance company represents the insurance company – not you. If the resolution of the claim makes everyone whole, then it is a win; however, if the resolution is to pay on an erroneous claim that damages your reputation, their concern is whether the cost of litigation exceeds the payout, not your reputation. In addition, if they can move a claim from the civil world of negligence into the criminal world of fraud, they may consider that as well, since illegal activities are generally not a covered risk. Insurance coverage is not complete. Take the time to understand what risks are really covered.
Client Relations. Professional liability insurance can have positive and negative effects on your client relationships. On the positive side, some clients like the assurance that your work is backed by insurance. On the negative side, I have seen professionals who fail to practice good “bedside manner,” in part because they are unafraid of being sued by their clients. After all, they have insurance. However, it seems logical that professionals who are connected with their clients not only have superior retention rates and fewer client complaints, but also fare better when a problem arises.
In addition, clients may initially like their professional to assume aggressive tax positions; however, the issue is not whether insurance secures client loyalty. Instead, the point is whether the tax position is supportable without leaning on liability insurance. Professionals should consider being more attentive to clients instead of reaching for the low-hanging fruit of tax savings gained by aggressive tax positions.
If an error or omission occurs, rather than calling in the professional liability carrier, perhaps the better approach is to proactively address the problem collaboratively with the client. In these situations, balance the legal realities involved, ensuring you do not compromise your insurance coverage or your other legal defenses, so contacting an attorney may not be a bad idea. Sometimes it may be best to face up to the problem rather than hide behind liability insurance.
Evaluate Your Situation
At the end of the day, professional liability insurance is a very good thing to have. All I am advocating is that you should insure your practice, but act as though you have not. Our profession is less about increases to premiums caused by claims and more about managing your tax and accounting practice in a way that is better for you, your employees and your clients. Be on guard against how your professional liability insurance could interfere with great customer service and attention to detail!