Key Takeaways

• All therapists must have professional liability insurance in order to practice
• The median cost of malpractice insurance for therapists is $56 per month
• Besides lawsuits, malpractice insurance can cover costs if a complaint against you is brought before your licensing board

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Professional liability insurance for therapists, sometimes called malpractice insurance for therapists or private practice liability insurance, protects you financially in the event you’re sued by a client. 

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It can also cover the cost of defending your license to practice should anyone file a complaint against you.

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Here’s a quick primer on professional liability insurance for therapists—what it is, how it works, and how to choose the right policy.

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Do therapists need malpractice insurance?

In a word: Yes.

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Beyond any local or state requirements that practicing therapists carry it, professional liability insurance could save you from shouldering a massive financial burden.

According to the American Psychological Association (APA), only about 2% of psychologists are ever sued for malpractice. But if you’re unlucky and you are sued, the financial impact could be serious. 

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According to a report released by the Healthcare Providers Service Organization (HPSO) and supported by the American Counseling Association (ACA), in 2019, the average cost of a malpractice suit against a therapist covered by insurers was $113,642.

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For many self-employed therapists, a settlement of this size without the benefit of coverage would be disastrous.

Professional liability insurance and the cost of defending your license

Professional liability insurance doesn’t only protect you in the event you’re sued for malpractice. It can also cover costs associated with defending your license to practice.

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Unlike malpractice lawsuits, which are typically filed only by current or former clients, almost anyone with some type of relationship with a particular therapist can initiate action against their license or certification to practice.

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Not only clients but family members, members of your social circle, colleagues, past or present employers, and regulatory agencies are all able to file complaints against you.

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The nature of those complaints can be wide-ranging, and touch on aspects of your personal life you might not immediately associate with your clinical practice. As the HPSO report notes, therapists can even have complaints brought against them for improper use of social media.

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The same report says that the majority of claims (63.7%) are closed with no action taken by the licensing board. But they still have a serious financial impact: the average cost in 2019 of defending a license to practice was $5,454. 

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And that expense applied regardless of whether or not the complaint was settled in the therapist’s favor—simply covering the cost of legal fees and lost earnings, as well as associated travel, food, and lodging fees.

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Finally, therapists are more likely to deal with licensing board complaints than malpractice lawsuits. Some reports claim that, over the course of 20 years in practice, 40% of therapists can expect to be faced with formal complaints.

What is the average cost of malpractice insurance for psychologists, therapists, and other mental health professionals?

According to Insureon, most therapists pay $800 or less annually for professional liability insurance, with only about one third paying over $800. The median cost for all therapists is $56 per month ($672 per year).

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Other sources say that therapists paying for general liability insurance that includes professional liability insurance should budget $350 to $1,750 annually for coverage.

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The exact amount you pay is highly individualized. It’s impossible to create a comparison between prices from different insurance carriers because your own rates will be based on the specific characteristics of your practice, including:

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• Your risk of being sued for malpractice (as assessed by individual carriers)
• The types of services you offer
• Your history of malpractice lawsuits

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If you work with high-risk populations, or if you have been sued for malpractice in the past, you may pay higher rates for coverage.

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While it’s not cheap, the good news is that professional liability insurance is an “ordinary” and “necessary” business expense, so it’s tax deductible.

Why do therapists get sued for malpractice?

Any client may bring allegations against you, no matter how strictly you adhere to your code of ethics. There is no 100% surefire way of ensuring you will never be sued for malpractice as a practicing therapist. 

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According to the HPSO report, 36.4% of closed professional liability claims in 2019 were due to inappropriate sexual or romantic relationships between therapists and clients or therapists and clients’ family members. 

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After that, the five most common reasons therapists were sued for malpractice were: 

• Failure to practice within the bounds of their competency (17.6% of all claims)
• Inappropriate sexual or romantic relationships with current supervisees (7.5%)
• Multiple relationships with a client despite the potential for client harm (5.9%)
• Sexual relationships with former clients or their family members before the five year waiting period had elapsed (4.4%)
• Improper sharing of information without client consent or legal justification (4.4%)

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The top ten allegations brought against therapists who defended their licenses in 2019 were:

1. Sexual misconduct (13.6%)
2. Failure to maintain professional standards (12.3%)
3. Breach of confidentiality (11.2%)
4. Reporting to third parties (7.3%)
5. Failure to practice within bounds of competence (7.1%)
6. Failure to accurately present qualifications or credentials (6.5%)
7. Issues with billing (6.2%)
8. Failure to observe parental or familial rights to make decisions on behalf of minor clients (4.7%)
9. Documentation issues (4.7%)
10. Abandonment (3.2%)

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If the potential allegations on this list sound severe, it’s important to remember that they can spring from clients’ interpretations of events, not objective truths.

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For instance, a therapist treating a client for substance addiction could find themselves on the wrong end of a malpractice lawsuit if that client relapses. The client might allege that the therapist failed to prevent their relapse.

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Or a therapist could recommend a client undertake a particular course of treatment, but if the client feels the treatment caused them harm or failed to work, they could choose to sue.

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Therapists have even been sued for malpractice when a client they were treating harmed other people. After the 2012 Aurora movie theater shooting, in which 12 people died, one victim’s wife sued the gunman’s therapist for failing to hand him over to authorities after he voiced violent fantasies.

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No matter how careful you are, there’s always a potential for a client to sue you. That being the case, professional liability insurance is just part of the cost of doing business as a therapist.

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What does professional liability insurance cover financially?

The exact coverage you get from professional liability insurance varies according to the provider and the policy. In general, you can expect a standard policy to cover the cost of:

• Legal fees
• Arbitration fees, in the event you settle the matter outside of court
• Damages paid in the event you’re found liable
• Wages lost due to time spent on legal proceedings
• Travel and lodging costs incurred in the course of settling legal proceedings

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You could incur some of these fees in the process of defending your license, too. Most therapists defending their licenses consult with attorneys at some point during proceedings, and pay the associated fees. And you may be required to travel or miss work over the course of your defense.

Important malpractice insurance jargon

Before you settle on a professional liability insurance policy, here are some terms you should familiarize yourself with:

• Claims-made coverage. Most professional liability policies are claims-made, meaning they only cover malpractice proceedings brought against a therapist after they’ve signed up for a policy.
• Prior acts coverage. Some policies allow you to opt for prior acts coverage, which covers you in the event a client sues for a previously unknown grievance that occurred before you signed up for your insurance policy.
• Tail coverage. After you retire, stop practicing due to disability, or die, tail coverage protects you in perpetuity. Any allegations made over your activities before you retired (but while you were insured) are covered.

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Professional liability insurance by practice type

How your practice operates and the types of treatment you provide affect what kind of professional liability insurance you need.

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In some cases, your policy may require additional riders. A rider is an add-on to an insurance policy that provides extra coverage. 

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Without a comprehensive policy—one that includes coverage appropriate to your practice—you put yourself at risk. A client or colleague could sue you for malpractice and, lacking complete coverage, you would be financially liable for damages and legal fees.

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Here are the most common scenarios where your practice might require additional coverage. 

Professional liability insurance for telehealth therapy

When you operate without a physical office, certain types of risk are eliminated. For instance, you don’t need slip-and-fall or premises insurance covering accidents that could occur when clients visit you in person.

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But telehealth introduces its own risks. Many telehealth practices are underinsured because they don’t take these risks into account.

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Your professional liability policy should include:

• Multi-state practice endorsement. Many standard policies only provide coverage in the state where you hold your primary license. If you treat clients in multiple states, you need to make sure you’re covered in all of them.
• Cyber liability and data breaches. When you transmit private health information (PHI), you’re at risk of data being accessed by third parties. Your policy needs to cover you in the event of a data breach or an error leading to data being leaked.
• Explicit telehealth coverage. Some older or generic policies don’t explicitly cover telehealth. Make sure your policy covers you for every form of remote therapy you practice—including both video and voice-only telehealth.

Professional liability insurance for group therapy practices

If you run a group practice with W-2 employees, you may be held vicariously liable for the actions of your clinicians—even if you have no direct involvement in a particular case.

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For complete coverage, you need:

• A distinct entity or business policy. This is in addition to each clinician’s personal coverage. Malpractice claims often include both the names of both the clinician and the practice. Entity or business coverage protects against that.
• Coverage limits that fit your practice size. For example, if your business coverage is limited to three clinicians, but you have eight working at your practice, you’re not fully covered. 
• Supervision liability. If your practice includes licensed clinicians supervising associates or interns, the supervisors could be named in claims filed against their supervisees.
• Employment practices liability insurance (EPLI). This type of coverage is separate from malpractice insurance for your business, but you can often purchase it as an add-on. It covers you against claims like wrongful termination, harassment, and discrimination.

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Heads up: If the other clinicians at your practice are 1099 contractors, you may not need the same coverage as you would if they were W-2 employees. It depends on local laws and the structure of your practice. Consult with a legal professional for help choosing the right type of coverage.

Professional liability insurance for LMFTs

Coverage for an LMFT practice is unique because a malpractice suit may include multiple clients, each of whom presents differing recollections of what was said or recommended during treatment.

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Coverage for your LMFT practice should include:

• Claim-per-incident language. The policy should define “claim” per incident, not per client—or else it should clarify how the policy handles a single session generating complaints from multiple parties.
• Adequate per-claim limits. A family therapy dispute may involve multiple named claimants in one incident. That can drastically increase the amount of the claim.
• Document and consent-related coverage. A large share of couples and family claims are the result of disputes over who consented to which disclosure. For instance, one spouse may allege that you shared session details inappropriately with the other spouse. Your policy should explicitly include coverage for this sort of situation.

Professional liability insurance for therapists doing forensic work or providing expert witness testimony

If you provide forensic services like custody evaluations, competency assessments, or expert testimony, you carry a very different risk profile than you do while performing clinical work.

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For one thing, you aren’t in a therapeutic alliance with the person you’re evaluating or testifying for or against. For another, your work is being scrutinized in an adversarial legal setting. Complaints are likely to include allegations of bias or negligence, or defamation resulting from a trial.

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Forensic work is one of the most commonly under-insured specialty areas. Many therapists who only take on a handful of forensic jobs each year—like custody evaluations—don’t realize their general policies fail to cover them for this type of work.

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Your policy should include:

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• A forensic or legal services rider. Most malpractice policies entirely exclude forensic activities, or set a cap on coverage that falls far below what a custody or civil case could generate in legal fees.
• Coverage for license board complaints specific to forensic work. Relative to how many clinicians do it, forensic work draws a disproportionate number of license board complaints.
• Coverage for testimony-related claims. By providing expert testimony, you open yourself up to being sued by parties who believe that testimony has harmed them.

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How to get malpractice insurance for your therapy practice

In most cases, the same insurance provider who handles your general liability insurance and commercial property insurance will offer some form of professional liability insurance.

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Many insurance companies offer business owner policies (BOPs) for small businesses. A BOP bundles general liability insurance and commercial property insurance into one package. BOPs typically do not include professional liability insurance, but check with your provider to be sure.

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When considering a potential policy, take into account whether it includes coverage for license defense and coverage in the event of alleged sexual misconduct, which not all policies cover.

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The cost of insurance is a standard budget item for most businesses. Learn how to create a budget for your therapy practice.

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Summary

• Malpractice insurance is non-negotibable—you need it in order to practice as a therapist
• The cost of insurance varies significantly depending on your risk level and history of legal proceedings
• The median cost of malpractice insurance for therapists is $56 per month, and most pay less than $800 per year
• Professional liability insurance covers legal fees and restitution in the event you’re sued for malpractice
• It also covers costs in case a complaint against you is brought before your licensing board
• Compare different policies before choosing the one that’s right for your practice

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The cost of insurance is a standard budget item for most businesses. Learn how to create a budget for your therapy practice.

Visit our Therapist Tax Center and Tax Deductions for Therapists Hub for everything you need to know about taxes as a practice owner. If you're just starting out, here's everything you need to know about How to Start a Private Practice as a Therapist.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.

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