Why Professional Consultants Need Their Own Insurance
July 14, 2022
Being a consultant can be a lucrative career for people who have expertise in a niche area. Businesses are becoming increasingly specialized. Many business owners find it is better to do one thing and do it well rather than trying to be a jack of all trades.
In some industries, consultants are in high demand and garner excellent wages for their service. A consultancy is a business, and consultants must treat it like one in every respect. They must handle administrative tasks, accounting, legal compliance, and pay taxes. Acquiring business insurance is optional, but there are risks in not having it.
We will look at what consultants do, the risks they face, and outline what types of commercial insurance they need to protect themselves and their businesses.
What Do Consultants Do?
The word consultant is an umbrella term that encompasses many different professions.
Management consultants work with companies to help them improve business processes, solve problems, and increase revenue. Marketing consultants guide business owners on strategies to reach their target audiences. Public relations consultants advise business owners on how to improve the company’s reputation. Today, it is difficult for companies to manage without the help of an IT consultant. These are just a few examples of what consultants provide in various industries.
The gig economy has also produced large numbers of freelance consultants. You will find them working as graphic designers, writers, photographers, videographers, interior decorators, and in other professions.
Consultants are unique in that they are inherently independent thinkers and go-getters. They have a reputation for getting things done. Moreover, they like being their own boss and making their own decisions. There are plenty of perks in consulting – flexible hours, autonomy, and the ability to make as much or as little as they choose.
Being self-employed also means accepting all the responsibilities of being a business owner. Consultants are totally on the hook if an interaction with a client goes badly. A lot can go wrong during a consultation. When a question comes up, there is no boss to ask for the answer.
Consultants are human, and they sometimes make mistakes. When that happens, and a client calls them on it, it could impact the client’s business. In the worst-case scenario, a client could hold a consultant legally responsible for damages.
A consultant needs to retain an attorney if they get called to court. One of the issues the court is likely to raise is whether the consultant had professional liability insurance and if so, how much liability the policy supports.
What Can Go Wrong for Consultants?
Consultants are proven experts with the necessary education and experience to guide other business professionals. Yet, many of the issues they consult on are highly complex. The situations consultants face often have no easy answers. Putting the two together creates a perfect storm for miscommunication, misunderstanding, and mistakes. One mistake can cost a consultant a lawsuit.
A few examples of what can go wrong in a consultant’s world makes it clear why consultants need to protect themselves and their businesses.
In the first example, an accountant provided inaccurate financial information to a client due to a simple data entry error. It was an honest mistake, but it caused the client to be way off on their financial projections for the third quarter, typically the largest quarter of the year. As a result of the error, the client’s company lost $100,000 and sued for damages in court.
In another example, an IT consultant failed to give a client all the necessary information to protect their client data. The omission resulted in a data breach that exposed confidential information about thousands of client’s customers. The client had to spend money to notify all their customers and advise them on how to protect their information. The client sought $200,000 in damages to compensate them for their loss.
All consultants bear risks and risks are different based on the type of consulting they do. A public relations consultant may face risks such as defamation or slander. An accountant or IT consultant may find themselves with a lawsuit for an error or omission.
Professional liability provides insurance to pay for lawsuits where consultants get accused of errors or omissions. Professional liability insurance policies are often known as errors and omissions coverage or E&O coverage.
The Risks of Not Carrying Coverage
Not having a professional liability policy can be a risk in itself. A client who learns a consultant does not have professional liability insurance may take advantage of the situation and try to take everything they have. Being fully aware the consultant does not have insurance; the client could decide to file a lawsuit quickly rather than try to work things out with the consultant directly. A substantial lawsuit can wipe out everything a consultant has including their home and financial assets.
The lack of professional liability insurance could cause a consultant to lose customers. Knowing the risks in hiring a consultant, some customers may require consultants to show proof of professional liability in a certain amount before they will contract with a consultant.
Professional liability is just one type of business insurance consultants need.
What Kind of Business Insurance Does a Consultant Need?
Consultants typically need to purchase several types of insurance policies.
Nearly all consultants need a commercial general liability policy. This policy covers claims for bodily injury and property damage caused by the consultant or the consultant’s business.
Consultants work from an office or their homes. Either way, they typically use office equipment such as computers, printers, and phones. Business property insurance covers the consultant’s business equipment. A business owners policy, also known as a BOP, combines general liability, property, and possibly some other coverages into one policy.
Consultants who hire employees may be required to purchase workers’ compensation insurance to cover their employees if they get injured or become ill on the job.
If consultants have vehicles that are titled in the name of the company or employees use them for business purposes it is also necessary to have commercial auto insurance.
While these insurance coverages are important, it is also vital for consultants to have professional liability insurance to cover errors and omissions.
Why Consultants Need Professional Liability Insurance
In the event of a lawsuit against a consultant, professional liability insurance will pay for damages and defense costs for acts of neglect, misinformation, negligence, mistakes, and omissions. The policy will pay for losses whether there is a basis for the claims or not.
Consultants that do not have professional liability insurance risk the chance of losing new customers who require it for every contract they enter into. Consultants that do not have professional liability insurance may be passed over in favor of a consultant that already has an active policy.
Word gets around about consultants who do not have the proper professional liability insurance, and not having it could cause a consultant to lose out on referrals or new business.
Consultants must buy a professional liability policy and keep it in force. Insurance companies would frown on a consultant who applies for a policy only when they need it to satisfy a client’s requirements, only to cancel it before the end of the term.
Costs of Professional Liability Insurance
Professional liability policies start at $250,000 of coverage and can be in increments of millions. Consultants commonly carry $1 million to $2 million in coverage. The amount of coverage a consultant needs primarily depends on the types of risks they have. This level of coverage sends a message to their clients that they take their consulting businesses seriously.
With a professional liability policy, consultants are not be responsible for legal costs, attorney fees, judgments, or settlements in lawsuits involving errors or omissions. Consultants can be held personally liable for damages if they lose a lawsuit and do not have professional liability. A consultant who has a professional liability insurance policy could file a claim and the insurance company would pay for everything. However, there is one exception. The insurance policy would not pay if the consultant performed an act intended to cause a client loss.
How much does professional liability insurance cost? That depends on the type of industry, number of consultants in a firm, coverage limits, and any prior claims. The cost of the premiums for professional liability insurance is worthwhile since business and personal assets could be seized as the result of a lawsuit.
Final Thoughts
Consultants are not legally required to purchase professional liability insurance in any province. Nonetheless, there is a much greater cost in not having personal liability insurance, as a consultant could lose everything.
More importantly, not having insurance can cause consultants to lie awake at night wondering whether they are on the brink of losing everything they care about with every decision they make.
If you are interested in having peace of mind knowing your business is protected, the licensed agents at Duliban Insurance will be happy to hear more about your business. We would love to help you make the best decision about your coverage. Contact Duliban Insurance at 1-855-DULIBAN.
