Reader Question: I recently started a consulting business. I’m wondering about professional liability insurance — is this what I need and do I definitely need to have it?
Consultants set the bar for other businesses and should lead by example, regardless of what their focus is. Consultants are hired to help companies be the best they can be, and if you don’t show that you’re making your business the best it can be, what does that say?
There’s no way around it — any company needs professional liability insurance. Your business, future, and personal assets aren’t protected without it. It’s one of the most important business investments you’ll make, and although you may see it as an extra expense, it’s a small expense compared to what it could cost you without it.
What Is Professional Liability Insurance, and What Does It Cover?
Professional liability insurance, sometimes called errors and omissions insurance (E&O), provides protection for businesses from risks not usually covered under general commercial liability insurance, which are two different kinds of policies.
Getting errors and omissions insurance as a consultant is much like doctors obtaining malpractice insurance. Like malpractice insurance, professional liability insurance should be a standard insurance product any business owner and/or consultant has.
Basically, E&O insurance covers anything you or your employees do that causes losses or damage. Some covered acts include:
- Documentation errors
- Verification mistakes
- Failing to protect clients’ property or data and/or misusing it of it
- Misrepresenting products or services
- Violating legal or state laws
- Theft, poor behavior or ethics, breach of contracts, or mistreating any aspect of the client or their business
- Ill advisement
- Exposing proprietary or confident company information
Risks Consultants Face
Consultants face a variety of risks purely because of the wide variety of services they offer. The risks largely depend on your specialty. For example, PR consultants may face risks of defamation and slander lawsuits, while human resource consultants could face risks of hiring someone who shouldn’t have been hired for obvious reasons. Any consultant can face the risks of being sued for tiny errors like those made in data entry.
Here’s a common example. Assume you have a technology consultant company and an employee suggests a certain billing system to a client, but this system fails to make an abundance of charges because your employee put some incorrect information into the system, costing the client a loss of hundreds of thousands. The client expects you to make up for that loss. Without E&O, hopefully you have several hundred thousand dollars (or more) and can immediately write a check. If you had E&O insurance, you’d be covered as long as there weren’t intentional acts to cause damages or losses. The insurance would help cover losses, court costs, or legal fees.
Regardless of how much experience you have, what awards you’ve won, your education, or size of your business, the bottom line is that you’re human, and humans make mistakes, intentionally or not. Unfortunately, one tiny mistake can cost greatly.
The Risks of Not Having E&O Insurance
In addition to the regular risks consultants face, the mere absence of E&O insurance presents risks, including:
- Greater Risks of Lawsuits
Not having it puts you at risk because companies may feel they can take advantage of you since you’re not protected. Without it, businesses know the next course of action is a lawsuit, which would put you in danger of losing everything else you have in your life, like your home or financial assets. There are some dirty businesses out there that could see this as an easy way to take you for everything you’ve got.
- Risk of Losing Business
Many clients want proof of E&O insurance before they’ll hire you. They want to know that if you or one of your employees makes a mistake, resulting losses or damages will be covered. If you can’t offer proof of coverage, some companies won’t even consider doing business with you. That doesn’t mean you can simply buy coverage when a company asks for it, show proof, do the job, and then cancel the policy every time you need coverage proof.
Furthermore, you probably won’t hear companies that initially asked for coverage proof say “When you bring me proof of coverage, I’ll choose you.” Usually they’ll just write you off completely when you say you don’t have it. Remember that word of mouth is the most powerful marketing tool. If word is that clients can’t trust what would happen if there’s an error, word of mouth can be your enemy. Worse yet, if you caused damages at one company and couldn’t cover the losses, how many clients do you think will be inviting you into their companies? There goes new business.
If word of mouth reaches current clients, there’s a chance they may release you. There goes present business. Past clients may not ever use you again after learning about such scenarios. There goes old business.
Do I Have to Have It and What Happens If I Don’t Get It?
If you don’t purchase this kind of insurance, you’re gambling not only with the business investments you’ve made, but with personal assets as well. If a judgment was made against you, and you couldn’t pay it, you could end up having personal assets seized, like your home, savings, or others.
Consultants are hired to relay their expertise and skills and help guide something to success. While it may not be state or federally mandated like auto insurance, you’ll likely have to show proof often, so having it helps establish you as a serious professional taking the right precautions. If you won’t invest in your own business, it looks like you doubt its value and as though you don’t take it seriously. Why would clients take you seriously if they think you don’t? Having E&O tells clients you’re dedicated to rectifying mistakes, responsible, and assures them they’re financially protected if your business causes them loss. The companies you’re working with most likely have protection, and they assume responsible businesses do also.
Prices vary according to the size of business, location, amount of coverage, and business specialties. If you’re concerned about cost, remember this: if a lawsuit is brought against you without E&O insurance, all personal and business assets can be seized to pay for judgments. That will certainly be more expensive than annual premiums on E&O policies.