What happens if I’m sued for professional negligence?

In this Article:

• Professional negligence lawsuits
• Potential implications
• Immediate response steps
• Consequences without coverage
• The bottom line
• Frequently asked questions

It’s a phone call or email no business owner wants to get: you’re being sued. Maybe it’s a disgruntled customer who feels you didn’t do the job as agreed, or maybe you or one of your staff made a mistake. Whether you are at fault or not, a lawsuit can be time-consuming and expensive. 
Here’s what you need to know about what to do if your business is sued. 

Professional negligence lawsuits 

When your business is sued for professional negligence, it is usually for an error (something you did that you shouldn’t have done or did incorrectly) or an omission (something you should have done that you didn’t). The alleged negligence would have resulted in harm to the person bringing the lawsuit in some way, usually financially. The purpose of the suit is to make them whole, meaning you as the defendant have to pay for their loss. 

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Potential implications

When your business faces a professional negligence lawsuit, the implications extend far beyond just the financial concerns of the lawsuit itself. Legal fees can quickly mount into tens or even hundreds of thousands of dollars, beginning with initial consultation costs and extending through prolonged litigation. These expenses often include attorney fees, expert witness costs, court filing fees, and deposition expenses.

Settlement costs represent another significant financial burden. Even if you believe the lawsuit lacks merit, the cost of defending against it might exceed potential settlement amounts, forcing many businesses to settle rather than litigate. These settlements can range from thousands to millions of dollars, depending on the alleged damages and your industry.

Reputational damage often proves even more costly than direct financial losses. In today's digital age, news of professional negligence litigation can spread rapidly across social media and industry networks. Existing clients may question their relationship with your business, while prospective clients might choose competitors instead. This damage can persist long after the legal matter concludes, affecting your business's growth and market position for years to come.

Business disruption during legal proceedings could severely impact your operations. Key team members may need to dedicate significant time to gathering documentation, attending depositions, and consulting with attorneys instead of focusing on core business activities. This disruption can lead to missed opportunities, delayed projects, and strained client relationships.

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Immediate response steps

When faced with a negligence lawsuit, your initial actions can significantly influence the outcome. First and foremost, contact your insurance provider immediately upon receiving any notice of a potential claim. Many policies require notification within specific timeframes, and delayed reporting could jeopardize your coverage. Your insurer can activate their claims team and begin coordinating your defense strategy.

Document gathering becomes crucial in these situations. Begin collecting and organizing all relevant materials, including:

• client contracts and agreements
• project documentation and deliverables
• email communications and meeting notes
• progress reports and status updates
• quality control records
• staff training and qualification documents.

During this critical period, you may consider limiting communication with claimants. Well-intentioned attempts to resolve the situation could inadvertently worsen your legal position and could negatively impact your position. Any statements you make, whether written or verbal, could be used against you in legal proceedings. Instead, consider directing communications through appropriate legal channels.

Consult your legal counsel for guidance. Experienced attorneys understand the nuances of professional negligence claims and can develop strategies to protect your interests. They may advise on:

• preserving electronic and physical evidence
• preparing formal responses to allegations
• managing internal and external communications
• developing defense strategies
• evaluating settlement options.

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Consequences without coverage

Professional liability insurance, sometimes called errors and omissions or E&O coverage, can protect your business by covering many of the costs of a negligence lawsuit. A good professional liability insurance policy should cover your defense costs as well as a settlement or judgment. Insurance companies like Hiscox can appoint an attorney with specialized experience in negligence cases to defend you when you are sued, if necessary. Businesses that don’t have this important coverage may face significant risks in the event of a negligence lawsuit.

Financial risks

Operating without professional liability coverage exposes your business to potential financial losses. Legal defense costs alone can quickly deplete business reserves, with attorney fees often ranging from $300 to $1,000 per hour. Complex cases may require hundreds of billable hours, creating a substantial financial burden before even considering potential settlements or judgments.

Settlement expenses could force uninsured businesses to liquidate assets or take on significant debt. While settlements vary widely based on circumstances, they frequently exceed $100,000 in professional negligence cases. Without insurance coverage, these costs would come directly from your business's resources or personal assets.

Personal asset vulnerability becomes a serious concern when operating without coverage. In many cases, claimants can pursue business owners' personal assets if business resources prove insufficient. This means your personal savings, property, and other assets could be at risk, potentially affecting your family's financial security.

Business impact

The absence of professional liability coverage could fundamentally undermine your business's stability and growth potential. Client trust and relationships often suffer when businesses lack proper insurance coverage. Sophisticated clients frequently require proof of insurance before engaging services, viewing it as a basic professional requirement. Without coverage, you may find yourself excluded from valuable business opportunities.

Your business reputation within your industry could deteriorate rapidly when operating without appropriate insurance coverage. Professional networks and industry associations often view insurance as a marker of business responsibility and stability. Lack of coverage may be seen as a red flag, potentially leading to reduced referrals and partnership opportunities.

Contract eligibility becomes significantly limited without proper insurance. Many large organizations and government entities require specific insurance coverage levels as a prerequisite for contract consideration. Without coverage, you may be automatically disqualified from lucrative contracts and opportunities.

Financial stability faces continuous threats when operating without insurance protection. Beyond the immediate risks of claims, including lawsuits, the uncertainty can affect:

• banking relationships and credit access
• vendor payment terms
• employee recruitment and retention
• investment opportunities
• business valuation.

These cascading effects demonstrate how a lack of professional liability coverage can create a domino effect throughout your business operations. As financial institutions and business partners become aware of your unprotected status, they may reassess their willingness to work with your organization. This vulnerability can transform what might have been a manageable challenge into an existential threat to your business's survival. The evidence is clear: professional liability insurance serves as a crucial foundation for sustainable business operations and long-term success.

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The bottom line

Your business can be sued for almost anything – even if you haven’t made a mistake. A lawsuit can be costly, even if you prevail at trial. Preparing yourself ahead of time for a potential lawsuit can protect your business.
Professional liability insurance, sometimes called errors and omissions or E&O insurance, is a crucial investment in your business's future. Understanding your coverage needs and securing appropriate protection helps ensure long-term success and stability.

Get a quote and help protect what you’ve worked so hard to create.

Don't wait until facing a claim—protect your business today. 

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Frequently Asked Questions

What does professional liability insurance cover?

This insurance covers claims of negligence, errors, or omissions in professional services, typically including legal defense costs, settlements, and judgments.

Is professional liability insurance mandatory?

Requirements vary by industry and jurisdiction. Some professions require it, while for others it's strongly recommended but optional.

How is errors and omissions insurance different from general liability insurance?

E&O insurance focuses on professional mistakes and negligence, while general liability insurance covers bodily injury, property damage, and personal injury claims often unrelated to professional services. Learn more about the differences between E&O or professional liability and general liabilty in this guide.

How much does errors and omissions insurance cost?

Costs vary based on industry, coverage amount, business size, and risk level, typically ranging from several hundred to thousands annually.

What should I do if I'm sued for professional negligence?

Immediately notify your insurance provider and gather any relevant documentation. Your insurer will guide you through the claims process.

Can I get professional liability insurance for a small business?

Yes, insurers offer tailored policies for businesses of all sizes, including affordable options for small businesses.
This material is for general informational purposes only and does not constitute legal advice. You should consult your own legal counsel regarding your specific situation.

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