As a small business owner, you are entrepreneurial by nature and open to taking personal risks that have the potential to result in long-term financial gain. This is likely why you decided to start your own business and probably one of the main contributors to your eventual success.
However, even with the most optimistic of business intentions, bad things can and do happen. We live in a society in which anyone can be sued, at any time, for any reason. This means that small consulting businesses that otherwise are operating well, have the potential to be crippled in a matter of months by unexpected litigation.
Unforeseen “catastrophic” events are the reason why the insurance industry was created. If given the choice between, at most, a couple hundred dollars per month in insurance premium vs. the possibility of bankruptcy due to frivolous litigation with a larger entity, wouldn’t you opt for the former? The reality is that consultants typically have a low probability of something serious going wrong. However, bad things still do happen, and if you happen to be the recipient of bad favor, this is a small price to pay.
Consider these recent examples:
A computer consultant was retained by a company in order to update its inventory control software. Installation of the new software took longer than anticipated. Comparisons of the system’s results with those generated by a manual process revealed that the new software had an inaccuracy rate of 35%. The company terminated the consultant’s services and demanded compensation for the software’s failures, including profits allegedly lost while the system was down. Discovery revealed that there were inherent problems with the software which did not become apparent until it was installed. The case still settled after court ordered mediation for $175,000. Defense costs totaled $125,000.
A large financial company in New York learned that an employee had been using alcohol and drugs while at work and then terminated the employee upon learning this. Litigation ensued between the former employee and the company. The consultant who provided HR related services to the company was also named in litigation. The consultant was ultimately dismissed from the lawsuit but only after $130,000 in legal costs were incurred.
Insurance companies now better understand that the overall frequency of litigation against consultants is often relatively low, and they are starting to offer more differentiated rates because of this. Professional Liability insurance policies that cover any actual or alleged mistakes you make while rendering your services to customers, are as low as $45 a month. General Liability insurance policies that cover actual or alleged bodily injury or property damage to a 3rd party, are as low as $35 per month.
Be courageous in your business and take risks that are calculated towards your success. But don’t be foolish and risk the possibility of everything evaporating because you decided to save a few dollars on insurance.