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What Is Professional Liability Insurance for Consultants?
Professional liability insurance is also called errors and omissions insurance. Its job is to protect a small business from lawsuits filed against it over unsatisfactory work performance. Even in the ideal world, mistakes happen. If you, as a consultant, make a mistake that causes financial harm to your client, this type of insurance can help to minimize financial losses incurred from a lawsuit or claim filed against the company.
It’s estimated that as many as 40 percent of small business owners lack any type of insurance, including liability insurance. Most companies, are underinsured, meaning they may still face financial liability should a claim be filed against them.
With professional liability insurance, a small error or mistake can lead to a significant loss for the company. If your business cannot manage that cost, you may be forced to use personal assets to cover the cost (depending on the structure of your business). The key to remember is that liability losses like this can happen to any consultant or freelancer even if you do not have sizable assets in your business.
A professional liability insurance policy is a type of risk management strategy. It aims to reduce costs and minimize potential damage to your business if a lawsuit were to occur. The policy can help cover a range of different risks including:
- Negligence claims made against you or your company
- Failure to deliver services
- Work mistakes that lead to financial loss
- Misrepresentation claims
- Inaccurate advice claims
In addition to this, some companies now require their consultants to maintain a professional liability insurance policy. If you do not have it, they may not be willing to use your services. No matter what type of consulting work you do, it is critical to have this type of protection in place.
What Type of Consultant Needs Professional Liability Insurance?
As noted, most small businesses including those operating as a sole consultant need to have insurance protection. It helps you to provide services to your clients with less risk of claims being filed against you that could lead to financial turmoil.
Here is an example of what could happen. Perhaps you are a consultant providing insight to a company on what financial steps to take to grow their business. They pay you believing that what you tell them is going to produce specific results. When those results do not happen, the company claims you mispresented your services or failed to deliver. They sue you for the lost revenue they could have earned.
A professional liability insurance policy may work to cover these costs. They can help you to defend against them by providing legal representation to you and your business should you go to court. This type of high level support for claims made against you is critical – it can help you to defend against inaccurate claims, too.
If there is a settlement with the client or the court awards a judgment for you, the policy may cover the fees including the settlement costs and all associated fees. The policy will cover claims made up to the amount of coverage you have in place.
There are many types of consultants that can benefit from having a policy like this in place. That may include:
- Media companies
- Career coaching companies
- Economic research companies
- Business and management companies
- Wedding consultants
- Expense savings companies
- Human resource companies
Consider what may happen in various industries. For example, if you are an IT consultant, you may advise your clients about security measures they can take to reduce risk to their organization. This can be a very important investment for the company. If the IT security strategy you recommend and place fails, the company may hold you responsible for their losses involved in that security breach.
A management consultant is another professional that is providing a large number of services within a corporate environment. These individuals also take on more risk than other consultants because of the promises they make to their clients. If the goal is for your services to lead to profit increases and that does not happen, the company may hold you financially responsible for those losses.
How Does a Professional Liability Insurance Policy Protect You?
As a consultant, you provide a specific service to your clients. If you do not provide that service or something happens and the project goes in the wrong direction, it becomes critical to have a way to help your client. Sometimes, you cannot.
Consultants face many risks in providing services especially when clients are promised a specific outcome that does not happen. Yet, with the help of a professional liability insurance plan, at least some of those risks are minimized.
The policy can help to cover many aspects of the would-be losses you could face. This may include:
- Defense expenses – The insurance company’s attorney is tasked with representing you in a claims court. That means you’ll have a high-powered and skilled attorney working to represent and work with you. Since the insurer does not want to pay out more than it should, they will work diligently to ensure the claim is refuted, denied, or settled for the lowest amount possible.
- Attorney fees – If you have your own attorney, the policy can help cover the actual attorney fees you may pay to defend yourself in a court of law or to provide coverage for settlement negotiations.
- Settlements – If the settlement or judgment is awarded to the other party, the policy is likely to cover the costs associated with that claim. There is a maximum amount of coverage provided on the policy, but it may cover costs up to that point.
- Court costs – The policy also covers court costs. These are fees charged to cover the costs of filing the claim or the overall court process.
With this type of policy, you can remain confident there is protection available to meet most of your needs when a claim occurs.
How Much Does Professional Liability Insurance for Consultants Cost?
Many variables play a role here. The cost of professional liability insurance is dependent on factors such as the size of your business. The key is to have enough coverage to cover the potential losses that may occur. For a wedding consultant, the risks may be lower, for example, than a large-scale corporate failure.
Your insurance provider will work closely with you to get a better understanding of what the risks are for your company. A component of this is based on similar claims by other consultants in your industry. Your insurance provider can provide insight into what the average liability claim is and help make sure you have enough insurance to protect against it.
There are other factors that play a role in the cost of professional liability insurance as well. Some of those factors include:
- How many claims you’ve made in the past or have been filed against you in the past. A clean history can help to produce a lower cost for insurance policies.
- The type of business you have also plays a role in costs. In some industries, there is more risk, and that drives up the cost of insurance policies. Your agent can give you more insight into the expected costs.
- The amount of coverage you need also plays a role in the overall price you will pay for liability insurance. The coverage you select should be based on the amount of risk present. The more coverage necessary, the more expensive the policy may be.
- The amount of experience you have in the industry can also play a role in this. If you have years of experience working as a consultant, you may be less likely to make a mistake that could be costly later.
You have some flexibility in costs. Your insurance provider may offer a lower rate to you, for example, if you bundle your liability insurance with other policies such as business insurance.
It is always possible to request a no obligation quote to get more insight into what you can expect from a policy like this. If you are unsure if you need insurance for your consulting business, be sure to speak to an agent about the specific benefits in your case.
Key Providers of Professional Liability Insurance
Some insurance companies provide consultants, coaches, and freelance professionals with professional life insurance policies. Others do not offer these plans or may not be as readily able to adjust policies to meet your specific needs. Take a look at some of the companies that offer this type of insurance.
Other Types of Insurance Consultants Need
Consultants and coaches may need other forms of business insurance to safeguard their business and personal assets. It’s a good idea to work with an insurance provider who can customize a plan to meet each one of your risks. Some of the other types of insurance your company may need include:
Cyber Liability Insurance: This type of business insurance can help to cover the financial loss that occurs as a result of a cybersecurity breach. For a consultant, this can be valuable if your clients’ personal information or financial information is lost as a result of such a security breach. It can help to cover various types of financial loss related to cyber theft.
Business Owner’s Policy: This type of insurance provides a range of coverage for you. It offers some flexibility but does offer some basic general liability insurance. It also provides for commercial property insurance to cover your real estate assets. For example, it may help cover your business locations from risks such as fires and theft.
Workers’ Compensation Insurance: If your business is large enough, you may have employees working for you. If that is the case, you may need a workers’ compensation policy to help cover any risks to those employees such as injuries that occur on the job. It’s important to consider state policies that may make workers’ compensation policies requirements.
General Liability Insurance: While professional liability insurance provides a higher level of protection or liability claims, most companies begin with a general liability insurance policy. It helps to cover third-party injuries, such as a person visiting your shop who suffers a fall as well as product failures such as if a product you sell causes injury to another party.
When it comes to keeping your consulting business operational, there are many steps to take to make that possible. You need to work hard, create relationships, and even manage taxes. However, it is always critically important to have business insurance in place that helps to reduce at least some of the risks to your business. A professional liability insurance policy is one type of protection that most consultants in all industries needs to minimize financial loss against errors or mistakes.
Take the time to compare a few different policies to find one for you. This type of insurance is essential to keeping your operation running long term.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.