There is a lot of responsibility associated with being a self-employed consultant, not the least of which is acquiring protection for yourself in the form of insurance. A simple search online will reveal that you need a form of insurance called Professional liability. While this protection is key to any consultant’s business, it isn’t the only insurance you’ll need. There are plenty of things that Professional liability does not cover, so let’s break it down.
Professional liability (PL) is also called errors and omissions (E&O) insurance, so if you read an article about one, you can feel confident that the information applies to policies under either name. To be exact about the protection that PL provides, it is a liability policy, meaning it covers legal expenses and damages. Specifically, it covers legal costs associated with lawsuits that are directly related to how you performed (or failed to perform) your service.
Here are some examples of situations that are not covered by a PL policy:
A prospective client comes to your office to meet with you and slips on your icy steps, breaking their wrist and suing you for the cost of their medical bills. This accident wasn’t related to performing your service, but rather negligence in making your office entrance safe. You’re still liable, but you’ll need a General liability policy to cover these legal costs.
An employee you hired to do your bookkeeping is helping you move a desk into a different room in your office, and cuts their hand open on a sharp edge. They need several stitches and have to miss work until their hand is useable again. They demand you reimburse them for the emergency room bill and their missed wages, or they’ll sue. You are also liable here, but in this case you will need Workers’ Compensation coverage, not PL.
You’ve just finished a meeting at your client’s office, and jump in your car to leave. Since you arrived, one of the client’s employees has parked their delivery van right next to your car. You try to pull out of the parking spot safely, but you scrape up against the van pretty bad, leaving noticeable damage on each vehicle. Your PL probably won’t cover this damage because you were not technically providing your service at the time of the accident. Neither will your personal auto policy, because you were not driving your car for personal use (like a commute to a 9-5, or to the grocery store), but rather for professional travel. You’ll need a Commercial Auto policy to ensure you are protected in this case.
So what is an example of what PL does cover?
Let’s say you are an IT consultant who was hired to build a new web-portal for an insurance company. It’s a pretty simple job, but about a week after you complete it you get an angry call from someone at the insurance company saying the portal isn’t working. Sure enough, when you try to load the login page on your computer, the system is down. You rush over to the client’s office and have an emergency meeting, where you find out that one of their tech employees made a change to a different application, which created an error with the portal.
You could have sworn that you told them to let you know when such changes were being made so you could keep the portal up-to-date, but they say otherwise. Going over the paperwork you gave them, you discover that you also forgot to give them that warning in print.
The company says you’re on the hook for all the potential business they lost due to the portal being down for 24 hours. The estimates revenue costs? $50,000. Ouch.
Professional liability will protect you in this case. It doesn’t stop the lawsuit, nor does it guarantee that you can’t be found guilty of negligence and such. What it does do is cover the costs of legal representation, as well as any damages you are found responsible for paying. These reimbursements can only go up to the limits set when you bought the policy. If you think you could be sued for more than the basic limit, you should ask for a higher one before you buy, or you should also purchase an Umbrella liability policy to create another layer of protection for your business operation.