What is an example of a professional liability risk?

An example of a professional liability risk is when a client suffers financial loss due to a professional’s error, omission, or negligence — such as an accountant misfiling taxes, a consultant giving wrong advice, or a marketing agency missing a critical deadline. These risks can lead to lawsuits, reputational damage, and major financial loss.

Understanding Professional Liability Risk

A professional liability risk refers to the potential for a lawsuit or claim when a professional service results in financial harm to a client.

Unlike general liability (which covers bodily injury or property damage), professional liability focuses on mistakes in the service or advice itself.

This type of risk exists in almost every industry where expertise, knowledge, or advisory services are offered. Even small errors can lead to six-figure claims.

Why This Risk Matters More Than Ever

• Clients are more litigious and aware of their rights.

• Contracts often require liability coverage as a condition of doing business.

• Lawsuits can bankrupt small businesses.

• One mistake can damage your reputation permanently.

For this reason, professional liability insurance (also called E&O or professional indemnity) is critical.

Real Examples of Professional Liability Risks

Let’s look at common real-world scenarios that illustrate this risk clearly:

1. Accounting Error

An accountant miscalculates a client’s tax return, resulting in penalties and missed deductions.

• Risk: Professional negligence

• Client loss: $60,000

• Outcome: Lawsuit for damages

• Insurance response: Covers legal costs and settlement.

👉 Even minor miscalculations can create major financial consequences.

2. Missed Deadline – Marketing Agency

A marketing agency is hired to launch an ad campaign before a product release. Due to miscommunication, the campaign is delayed.

• Risk: Breach of contract and negligence

• Client loss: $120,000 in lost sales

• Outcome: Lawsuit filed

• Insurance response: E&O coverage pays legal defense and damages.

👉 Timing errors are one of the most common professional liability risks.

3. IT System Failure

An IT consultant implements software that fails to launch properly, crashing the client’s e-commerce site for several days.

• Risk: Professional error, negligence

• Client loss: $90,000 in lost revenue

• Outcome: Claim filed for damages

• Insurance response: Legal fees and settlement covered.

👉 Tech industries face growing liability risks due to dependency on digital systems.

4. Real Estate Misrepresentation

A real estate agent fails to disclose a structural issue in a property. The buyer later discovers the problem and sues.

• Risk: Omission and misrepresentation

• Client loss: $100,000 in repairs

• Outcome: Lawsuit for negligence

• Insurance response: E&O covers the claim.

👉 Real estate claims are among the most common E&O risks in the U.S.

5. Bad Legal Advice

An attorney fails to file a lawsuit before the statute of limitations expires.

• Risk: Legal malpractice

• Client loss: Estimated $500,000

• Outcome: Malpractice suit

• Insurance response: Legal costs and damages covered.

👉 Professional liability risks are especially high in law and healthcare.

Industries Most Exposed to Professional Liability Risk

👉 The more specialized the service, the higher the exposure.

Common Causes of Professional Liability Risk

1. Human error (e.g., miscalculations, missed deadlines)

2. Poor communication between provider and client

3. Lack of documentation or unclear contracts

4. Failure to follow industry standards

5. Inadequate quality control or review processes

6. Breach of professional duty or omission

Even experienced professionals make mistakes. The key is having strong processes and protection in place.

How Professional Liability Insurance Protects Against These Risks

Professional liability insurance:

• Covers legal defense (even if the claim is groundless)

• Pays settlements and judgments

• Helps protect your reputation

• Keeps your business financially secure

Without coverage:

• You pay legal fees and settlements out of pocket.

• One claim can wipe out your business savings.

• Clients may stop working with you.

How Claims Typically Unfold

1. A client alleges negligence or financial loss.

2. A claim or lawsuit is filed against your business.

3. Your insurer provides legal defense.

4. The insurer pays settlements or judgments (up to policy limits).

5. Your business continues operating without catastrophic losses.

👉 Early reporting of incidents often leads to lower claim costs and faster resolution.

Risk Management Tips to Reduce Exposure

• Use clear, written contracts outlining scope and limitations.

• Keep detailed records of communication and work.

• Provide accurate timelines and realistic expectations.

• Maintain ongoing training for you and your team.

• Secure E&O insurance that fits your industry and risk level.

Professional Liability Risk vs General Liability

👉 Both types of coverage can work together to fully protect your business.

Why This Coverage Is Non-Negotiable

• Many clients and contracts require E&O insurance.

• It protects against claims that can exceed $100,000.

• It gives peace of mind and allows you to focus on growth.

• Even the best professionals can make honest mistakes.

Toby Hansen Agency works with nearly 100 carriers to help businesses secure the lowest price for the best coverage.

Final Thoughts

So, what is an example of a professional liability risk?
✅ It’s when a professional error, omission, or negligence leads to a client’s financial loss — and a potential lawsuit.

Whether you’re a consultant, marketer, accountant, or attorney, this risk is real and growing.

👉 With over 30 years of experience, Toby Hansen Agency can help protect your business with the right professional liability insurance.
📩 Fill out the form below to get your free quote today and shield your business from devastating claims.