Professional liability insurance can help protect savings

The most fundamental task in retirement planning is the management of risk. It is critical to identify sources of unacceptable, or catastrophic, risk and to neutralize these risks by either eliminating them or insuring against them, if possible.

One potentially catastrophic risk often overlooked by federal employees is liability for damages stemming from their performance on the job.

Any federal employee can be the target of a lawsuit filed by a private party for alleged violations of their legal rights. Most at risk are managers and employees who have frequent dealings with the public, such as those at the Department of Homeland Security’s Customs and Border Protection, Immigration and Customs Enforcement, and Transportation Security Administration, and the Agriculture Department’s Animal and Plant Health Inspection Service. In addition, many federal managers and executives make decisions that make them vulnerable to being sued by a citizen.

It is not unusual for legal expenses in defending against a lawsuit or administrative action to run into the tens of thousands or even hundreds of thousands of dollars. In a worst-case scenario, damages could run into the millions of dollars. You must defend yourself against any claim made against you, whether you are guilty or not. Innocent conduct provides no assurance that you will not be the target of a lawsuit or administrative action.

Personal liability insurance like that provided with homeowner’s insurance or under an umbrella liability policy is not likely to cover these expenses or damages. And since our legal system allows claims to be filed without consequence to the plaintiff, caution and preventive practice can only go so far in mitigating risk. It is always possible that a baseless claim will force you to bear the expense of defending yourself.

Fortunately, there is insurance designed to cover this risk. Professional liability insurance, or PLI, for federal employees covers the cost, within limits, of defense in an administrative disciplinary action, investigation or judicial sanction proceeding. It will also pay a personal judgment in a civil suit. Agencies are required by law to reimburse managers, supervisors and law enforcement officials for up to half the cost of the annual premium. The leading policies generally cost around $300 per year for $1 million, or more, in protection.

I recently studied the impact of various levels of liability costs on career federal employees’ retirement standard of living and found that even modest spending on defense or damages early in a career can have a devastating effect.

For example, $10,000 in unexpected expenses early in a career can cut post-retirement spending levels by more than 4 percent. With $50,000 in surprise liability costs, this reduction jumps to 26 percent, and with $200,000, it rises to a whopping 77 percent. Imagine living on $33,000 per year during your retirement instead of $100,000 because of a large professional liability claim early in your career. While the numbers here are based on hypothetical case analysis, they accurately represent the risk associated with unexpected costs that occur relatively early in a federal career.

Although the financial damage that can be done by an uninsured professional liability claim is clearly quite large, the statistics indicate that the likelihood of having to pay is relatively low. This is an ideal situation to insure because the cost of doing so is low. I found that paying for insurance over a 35-year career reduces the retirement spending in my test case by less than 1 percent.

I encourage all federal employees to consider PLI as part of their financial planning. Along with medical, personal liability, property and disability care risk, professional liability risk should be on the radar of every federal employee.

An Internet search for the terms “federal professional liability insurance” yields a number of sources offering coverage, including Federal Employee Defense Services, Wright USA, American Federation of Government Employees and Government Employee Benefits Association. Benefits and, from what I hear, service, can vary widely, so you should compare the options carefully.