Why Do Consultants Need Liability Insurance?


Why Do Consultants Need Liability Insurance?

Sep 25, 2018 · 9 minutes to read

You’ve earned an MBA from an eminent university. You’ve worked for a decade in the C-Suite of a prestigious international consulting firm. Your co-workers often encourage you to strike out on your own. You’ve finally decided this is the year you will blaze a new trail and begin your own consulting business.

Starting your own small consulting company should be simple enough. It doesn’t take much to start working as a consultant. You’ll need to register your corporation, buy business cards, and find paying customers. Wait a minute. Isn’t there something you’re forgetting? What about Liability Insurance for consultants?

Liability insurance is vital to any successful and secure business. In fact, as a consultant, you’ve advised many organizations to purchase liability insurance. So why would your consulting firm be any different?

In the course of sharing your expertise and knowledge with fellow business owners, you may accidentally make an error which can have significant financial consequences. Liability insurance is the best resource for those unfortunate occurrences. Liability coverage will protect both your business and personal assets.

If you would encourage another company to buy liability insurance, then why wouldn’t you follow your own advice?

When Would A Consultant Use Liability Insurance?

Consultants face a broad variety of risks simply because of their line of work. Professionals like yourself work closely with clients in many important aspects of their businesses. As a result, consultants are usually privy to critical functions within their customer’s organization. A mistake, however innocent, may have a huge impact on the organization’s operations. Therefore, the nature of a consultant’s work usually puts him/her at a higher risk for a liability lawsuit than other professions.

For example, Marketing consultants may face the possibility of slander or defamation lawsuits, while Accounting consultants could face the possibility of making a data entry error that negatively impacts accounts payable, including employee payroll. These are very distinct situations that could both result in a disgruntled customer filing a lawsuit.

The extent of risk and liability in your consulting work depends greatly on the type of services provided and tasks performed. Keep in mind, your risk isn’t based on the probability of you losing a liability lawsuit but rather the prospect of a customer bringing a liability lawsuit against you in the first place. The financial impact of defending your services against a lawsuit can certainly drain your bank account. By securing liability insurance, you will have some comfort knowing there are financial resources available should your consulting firm face litigation.

Of course, in America, there are plenty of frivolous lawsuits filed every day. Perhaps the civil case a former client brings against your consulting company is very weak. Unfortunately, you will still have to spend time and money defending yourself in court. Once again, liability insurance would certainly come in handy even if a lawsuit.

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Business Contracts Rarely Replace Liability Insurance

Over and over again consultants make the mistake of believing their business agreements will excuse them from being sued. In reality, it’s rare that contract language will completely excuse you from being named as the defendant in a liability lawsuit. For example, maybe your standard contract states that in no case can your consulting firm be held responsible for damages that exceed the money earned from the project. Maybe this language will protect you. Maybe it won’t. You will have to wait for an actual liability lawsuit to develop to know for sure.

If you are relying on your business contracts as your method for avoiding lawsuits then you should certainly consult with an attorney. Be sure your agreement is reviewed by legal counsel and the language is written properly for your purposes.

And be prepared for your attorney to also tell you to invest in good liability insurance. Liability insurance is a great Plan B. In fact, liability insurance may save your consulting business thousands of dollars if your contract doesn’t do the trick. A contract isn’t going to pay your legal defense and a possible lawsuit settlement to the plaintiff. On the other hand, liability insurance will pay those costs for you.

Types of Liability Insurance Available to Consultants

Commercial General Liability (CGL) insurance

Commercial General Liability (CGL) insurance is useful to protect your consulting business in the event a client files a suit claiming you caused them an interruption in service or financial loss. General liability insurance can also cover you for things such as a client falling over a box in your home office and breaking his/her leg. Or if you work as an IT consultant and accidentally spill coffee on your customer’s network server.

General liability will defend your consulting business if it is named as a third-party in a lawsuit as well.

Professional liability insurance

Professional liability insurance is also known as Errors & Omissions (E&O) insurance. E&O insurance is recommended if you provide professional services for a fee, such as consultants, accountants, and lawyers. Professional (E&O) liability insurance is meant to protect you if a client files a liability lawsuit specific to how you did not live-up to your professional obligations. Professional (E&O) liability insurance will safeguard your business against any claims for unintentional mistakes, inaccurate advice, violations of good faith, and general negligence.

How Much Will Liability Insurance for Consultants Actually Cover?

You may be able to purchase liability insurance for less than ten dollars a day. For such a small expenditure, you will get a large amount of coverage. Liability policies include both an aggregate liability limit and a per occurrence liability limit. Most liability limits vary between $500,000 and $4,000,000.

Remember, your business is responsible for any costs that surpass the liability limit on your policy. For example, if you are unlucky enough to lose a civil case for $1,000,000 and your policy limit is $500,000 then you will have to cover the remaining $500,000 that is due to the plaintiff. Furthermore, if your business is not able to cover the remaining amount owed (beyond your liability limits) then you will be personally responsible. Think about that for a few minutes. Now you probably don’t think that minimal premium amount (for the maximum liability limit) seems like much money after all.

BizInsure will be glad to review with you all the nuances of liability insurance, including premiums and liability limits.

Can Liability Insurance for Consultants Help Grow My Business?

Liability insurance for consultants serves a purpose beyond simply offering protection if a civil lawsuit is filed against your business. If your consulting business secures a liability policy, it will provide other advantages such as the following.

  1. A Certificate of Insurance (COI) is frequently required if you submit a business proposal to new clients. The establishment that is interested in hiring you will want to be sure you are covered in case of any liability issues. If you don’t have liability insurance, you will most likely not be selected to a consultant. In fact, many corporations now require 1099 employees to have active liability coverage with liability limits matching the company’s own limits. Bottom line: if you want to expand your opportunities then liability insurance is a great investment.
  2. You may feel extremely confident in your professional consulting skills and believe no mistakes will be made so no need for liability insurance. However, if you have plans on growing your business and hiring additional consultants, doesn’t that increase your chances of an error being made? What if a new employee working as an IT consultant makes a coding error while setting up proprietary software for an important customer? Maybe you wouldn’t have made that same coding error but it doesn’t matter what you would have done. It only matters what happened. If your employee is at fault for messing up a big software project, then you will need to defend the allegations and possibly pay for damages.
  3. The premium for your liability insurance is actually a deductible business expense. The Internal Revenue Service (IRS) allows businesses to deduct any money that is spent in the process of conducting a business or trade. Not only will you have the confidence in knowing liability insurance is in place, but the deduction will actually help your annual tax bill.

What Happens If I Don’t Get Liability Insurance for Consultants?

You can certainly continue on with your consulting business without buying a liability policy. However, this is taking a significant risk in hopes that you will never make a mistake and never encounter an individual that is litigious. If even one incident occurs in the future and a judgement is made against you, what will you do to cover all the costs? Can your business afford to absorb such an expense? Or could one unfortunate accident result in you losing your business?

Keep in mind, if you default on a judgement then your personal assets are subject to being seized. Any personal property or personal savings that you possess can be taken. Your income tax returns and any future income you earn will be garnished. Basically, you will not be able to escape a judgement that is owed.

This would be a rather unfortunate outcome when you consider the minimal cost of a liability policy for consultants. Premiums for liability insurance vary on several factors such as the size of business (number of employees and total payroll amount), location, amount of coverage, and business specialities.

For example, consultant liability insurance may vary anywhere from $1,000 per year for a single consultant to $3,000 per year for a medium sized consulting firm. That breaks down to about $2.73 to $8.21 per day for liability coverage.

By not purchasing a liability insurance plan, you may also be eliminating yourself from additional business opportunities. As we explained earlier, many potential customers will require you to have liability insurance in order to earn their business. It would be a shame if you receive a chance to consult on a big project only to be told “nevermind” because you don’t have liability insurance. Get a policy set-up immediately so you don’t lose out on any business opportunities, while also protecting yourself from future hassles.

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