4 Key Factors That Determine Professional Liability (E&O) Premiums
Professional liability insurance, or E&O (errors and omissions) insurance as it’s more commonly known, is an important coverage for businesses that provide services to clients in exchange for financial compensation. E&O coverage protects businesses from errors made while performing work for clients. Common issues this coverage responds to include contract disputes and complaints about the quality of work provided.
This article will review four key factors used in determining the cost of E&O insurance for your business. This information can help you attain a better grasp of how this coverage is priced when negotiating coverage and premiums that best suit your business.
Key Factors That Determine The Cost of E&O Insurance
01. Business Class
The type of consulting firm you operate will dictate the rates the insurance company will apply. A tech consulting firm will have a different rate than a management consulting firm. Rates are determined based on national loss data as well as the insurance company’s specific loss experience with each class of business. It’s best practice to obtain quotes from an insurance broker that is experienced in E&O coverage to ensure your business is classified correctly.
02. Limits
The more coverage needed, the more the insurance will cost. Typically, purchasing $2,000,000 of E&O coverage will not cost double what a $1,000,000 plan costs, but it depends on the type of insurance and the carrier’s underwriting methods.
03. Revenue
Underwriters usually use gross revenue as the indicator of the size of a business. To an insurance carrier, more revenue equals more services provided to clients and thus more chances for errors to occur leading to E&O claims. Revenues are then applied to a standard rate (specific to your business) to generate a premium amount. Simply put, the more revenue your company makes, the more you’ll likely be paying in premiums to cover your professional liability risks.
04. Deductible
The higher the deductible, the lower the premium. Underwriters will typically have flexibility in this area. You may want to ask for a few different options so that you can assess the cost-benefit of the various levels. Remember to ask whether the deductible applies to “indemnity” and “defense” separately or only once. For more information on this, please see our other article, “6 Things You Need to Know Before Buying E&O Insurance for your Consulting Firm.”
Wrapping Up
E&O insurance is a necessary coverage for any service-oriented business. In today’s litigious society, this coverage gives your business the protection it needs to defend itself from lawsuits that can be a financial nightmare if retained solely by the business. These key factors will help you understand how your premium is derived. Now it’s up to you to obtain the coverage that best fits your organization.