Professional Liability Insurance For Consultants - Explained
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19 minute read
As a consultant, your clients hire you for your specific expertise, knowledge, or skills in industries or areas of business. Whether it’s providing career advice, business management strategy, or even software implementation guidance - consultants do a wide variety of tasks and have unique exposures to risk.
The problem is that general liability insurance (the most common type of business liability insurance) covers bodily injury and property damage that you cause others. This type of insurance is important, but it does not cover the primary risk to your business, which is causing economic losses to your clients as a result of negligence, or an error or omission, during the rendering of your professional services.
This is why professional liability (or errors and omissions (E&O) insurance) exists: to cover economic harm that you are negligent in causing.
For example, a management consultant has very little risk of causing physical damage to their client, but the risk of providing business advice that causes a financial loss (i.e. a drop in sales) to the client is much greater.
What type of consultants need professional liability insurance?
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Whether your business needs insurance is ultimately up to you, your preferences, and your ability to bear losses. At LandesBlosch, we use the below indicators to decide whether we recommend consultants purchase professional liability insurance. This type of policy is a must-have if you:
Provide Professional Services Or Opinions For A Fee
If you provide professional services or opinions to either individuals or companies, you need a professional liability policy to cover economic losses that could arise while performing your services.
Provide Specialized Expertise
If you possess specific expertise or knowledge in a certain area of business (such as a software implementation), and charge your clients for services relating to your expertise, you need a professional liability insurance policy to cover economic losses that you might cause clients.
Have Clients That Incorporate Your Services Into Their Product Offering
If another business's product offering is reliant on the delivery of your product offering, you have a risk of financially harming your client.
For example, let’s say you are a cyber security consultant and an IT management firm integrated your cyber security auditing services within their offerings, but hackers breached the system and accessed sensitive data, resulting in a financial loss for the client. You need a professional liability policy to not only cover the relationship with your client (the IT firm), but also your liability to their client.
Support Clients In An Administrative Function
If you support your clients by providing administrative functions, such as back-office support, you should consider a professional liability insurance policy in the event a mistake results in a financial loss.
Have Clients That Require You To Carry Professional Liability Insurance
Many consultants cannot begin work with their clients unless they sign a contract specifying they will carry a certain level of professional liability insurance. Once you sign this type of document, you need to purchase a policy to comply with your contractual obligations.
Provide Technology Services
If you provide any type of technology services to clients, such as application development, website development, or IT networking consulting, you need a professional liability policy.
Provide Healthcare Services
If you provide healthcare services or consultancy, you need a professional liability policy. Healthcare professional liability policies are usually specialized and include some bodily injury coverage. For more information about healthcare professional liability, give us a call to discuss what is available to you.
What does professional liability for consultants cover?
Almost all professional liability policies cover "wrongful acts" that occur while you are rendering your professional services. You usually have to visit the definitions section of your policy or quote to find this language, but wrongful acts usually means the following:
Financial loss that results from services rendered
The primary coverage provided by professional liability insurance is the financial loss caused to your clients due to an error in the professional services that you are hired to provide. These coverages include:
- Actual Or Alleged Errors & Omissions - Your services contained provable errors, and even alleged errors (it does not have to be true for insurance to cover it).
- Negligence - Your failure to take proper care results in an economic loss to the client.
- Misleading Statements - Your services claim to create a certain outcome, and that outcome is not achieved.
- Breach Of Duty - You breach your obligations as a consultant for whatever services you provide.
Breach of Contract
Many professional liability policies provide coverage for the money you are liable for in the event of an unintentional breach of contract with your client.
Sub-Contractor Vicarious Liability
Some professional liability policies afford the same coverage to situations that arise from work your subcontractors perform, as they would to liability arising from your own acts.
Intellectual Property Rights & Defamation
Often, professional liability insurance will cover copyright infringement, trademark infringement, libel, slander, wrongful eviction, and many other coverages found in the Personal And Advertising Injury section of a general liability policy.
You generally do not want the same coverage on both your general liability policy and professional liability policy, so read which policy provides broader coverage.
Contingent Bodily Injury & Property Damage (Not All Policies)
If a mistake in your work could result in the injury of a person or destruction of property, you absolutely need to purchase contingent bodily injury and property damage coverage in your professional liability policy.
This is usually an automatic coverage only if you are a healthcare provider, but can be an absolutely necessary addition to your insurance policy based on your profession.
Pollution Incidents (Not All Policies)
While not as common as many other coverages, we do see professional liability policies that include pollution incidents as a covered claim. Consultants working in hazardous waste, energy, mining, and similar industries would greatly benefit from this coverage. Although it is rarely a used coverage, pollution incidents are associated with such high costs that it is worth the effort to find this coverage.
What are covered damages under consultant professional liability insurance?
Legal Defense Costs
A professional liability policy will cover the cost of your legal defense team, expert witnesses, forensic investigators, and much more, to formulate and argue your defense in court, settlements, and mediations.
Amounts Due As A Result Of A Judgment Or Mediation
Suppose you are found liable or partially liable for a professional mistake covered under your policy. In that case, the insurance company will pay the sums of money due for judgments or verdicts against you, up to the limit of insurance that you purchase.
Punitive Damages (Not All Policies)
This is highly dependent on the state (insuring punitive damage is illegal in some states) where you live and the insurance carrier that writes your professional liability policy, but some policies can include punitive damages payments within the limits that you purchase.
Disciplinary Proceedings (Not All Policies)
Depending on the type of work you are doing, sometimes there are disciplinary proceedings after a professional liability incident. For example, attorneys might receive punishment from their state bar association. For some industries and professions, the professional liability insurance policy will cover these proceedings.
Loss Of Earnings (Not All Policies)
If you are spending time in depositions and trials, it can significantly impact your revenue, especially if you run a small business. Some professional liability insurance policies cover your lost income while trying to resolve a lawsuit.
What doesn’t professional liability for consultants cover?
Although many professional liability policies are quite broad, it is important to note that they don't cover any situation that could arise. Here are some things that are NOT covered by many professional liability insurance policies:
Billing Or Pricing Errors
If you bid or invoice a job incorrectly and lose money as a result of the invoicing mistake, that is a loss not covered under a professional liability insurance policy.
Unpaid Work (Check Your Policy)
This is highly dependent on the policy you purchase, but many policies only cover services that you charge a fee for; they do not cover work you perform for free.
If you frequently perform pro bono or unpaid work, make sure your policy covers these services.
Services Not Disclosed To The Insurance Company
Frequently, insurance policies limit covered professional services to those listed on the declarations page (one of the first pages of the policy).
Make sure that the description of your business fully encompasses the type of work you are performing, or else it might not be covered.
Return Of Professional Fees
If a client is unhappy with the service that was provided, but no economic loss resulted as a result of your services (besides the fee you charged), paying an unhappy client is not covered under a professional liability policy.
Bodily Injury/Property Damage
Property damage and bodily injury are not covered under most professional liability policies, but you can request that contingent bodily injury and property damage coverage get added to the policy.
Warranty Or Guarantees
If a claim would not have been covered under a professional liability policy without a warranty or guarantee of your product, the professional liability policy will not cover any economic losses arising from the warranty of your services.
How To Get The Best Professional Liability Quote
Know Your Consultant Classification (In Insurance Terms)
The first step is to have a clear idea of how your insurance broker will classify your business to provide an accurate quote. Here are some examples of consultant classifications, although this is not an exhaustive list:
- Actuarial Consultant
- Agricultural Consultant
- Audio & Visual Consultant
- Compensation & Benefits Consultant
- Educational Consultant
- Engineering Consultant
- Graphic Art & Design Consultant
- Healthcare Consultant
- Interior Decorator
- Procurement Consultant
- Project Management Consultant
- Sales Consultant
- Strategic Planning Consultant
- Training & Development Consultant
- Business & Management Consultant
- Business Communications Consultant
- Market Research Consultant
- Marketing Consultant
- Media Consultant
- Public Relations & Crisis Management Consultant
- Business & Leadership Coach
- Career Coach
- Corporate Trainer
- Economic Research Consultant
- Energy Use Consultant
- HIPPA Consultant
- Jury Selection Consultant
- Payroll Processing Consultant
- Human Resource Consultant
- Organization Structure Consultant
- Safety & Loss Control Consultant
Know Your Biggest Risks And Explain How You Avoid Them
When applying for an insurance policy, think of the worst-case scenario for your business and briefly describe how you are managing that risk. The underwriter will likely be considering that risk, and explaining how you already addressed it can get you significant discounts on your policy.
Always Use A Contract With Your Clients & Subcontractors
Having a favorable contract in place with all your clients and subcontractors is not only a good business practice, but many professional liability insurance companies will not provide a quote without them.
LandesBlosch Tip: Provide copies of your current contracts to your insurance broker. This will help them secure extra discounts and broader coverage for you.
Know Your Client's Insurance Requirements And Allow Yourself Time To Negotiate Them
We see it all the time. A single-person consultancy wants to work with a large company that is accustomed to contracting with other large companies. At the last minute, the consultant realizes their client wants them to carry $10 million or $25 million in professional liability limits to begin work.
This means the insurance cost for the consultant goes from $1,200 annually to $75,000 annually, due to the limit of insurance requirements.
If possible, give yourself time to negotiate with the client to try and lower those limits. Those requirements could have been made for large companies doing very risky work, and the client might make an exception to lower the limit requirement if you ask.
Try To Get Full Prior Acts Coverage Or A Retroactive Date That Covers 2-Years’ History
Professional liability policies are almost always written on claims-made policies. This means the claim has to occur and be reported to the insurance carrier within the same policy period (the policy period is usually however long you have been with the same insurance company).
A retroactive date extends this period into the past to cover claims that have occurred (a mistake in your work), but you are currently unaware of.
A professional liability insurance company can usually cover events that occurred a couple years ago, but some insurance companies agree to cover claims since the formation of your company (this is called "full prior acts" coverage).
Get Cyber Liability If You Work In Technology
Due to the nature of technology work and how professional liability policies are structured, make sure your policy covers both professional liability and cyber liability if you are doing any kind of computer consulting or programming. These combination policies are usually referred to as technology E&O insurance.
How much does professional liability insurance for consultants cost?
This is a tough question since every consultant business is different in regard to the type of work they do, their client portfolio, and their experience in the field. That being said, there are usually four important factors that underwriters use when determining pricing for a professional liability insurance policy for consultants:
What type of professional services are you providing?
The most important question that underwriters try to answer is: Exactly what type of work are you performing? And how risky is that work in the context of professional liability insurance coverages?
A weapons manufacturing consultant will obviously have a much different risk profile than a life coach.
What are your revenues?
The second element underwriters try to determine is the scale of your business. Is it a large business generating $100 million in revenue, or a new business that estimates $50,000 in revenue?
This will determine the scale of operations that they are insuring.
Do you have prior insurance and need a retro date?
Do you need coverage for the past year or past 20 years? If you have been in business for decades and need coverage for incidents that might have happened in the past but are not aware of (which we recommend doing), that might cost a little more than not covering any prior work that you performed.
How much experience do you have?
Finally, an underwriter will want to know how much experience you have in the type of work you are performing. When underwriting higher risk policies, the underwriter might even ask for a resume. This is because consultants with years of training and experience will have preferential rates to those who have very little experience in the field.
Consultant Professional Liability Frequently Asked Questions
As a consultant, do I need coverages other than professional liability?
In general, the essential coverages that consultants need are professional liability and general liability. If you have employees, you might need a workers compensation policy. Additionally, if you have a company vehicle, you should get a commercial auto policy.
Why are fees & tax charged on quotes?
Many professional liability policies are written by specialty excess & surplus insurance companies, such as Lloyds of London. These types of carriers charge a fee and state tax with each policy. This is very common for professional liability policies.
My client requires a very high limit; can you still help?
Yes. We can accommodate almost any professional liability limit from $1 million to over $25 million.
Can LandesBlosch help with industries such as aerospace, oil & gas, and utilities?
Yes. We help consultants that work in almost every industry, including aerospace, finance, and energy.
Can I get a quote online for my consulting business?
If you are a small firm with a low-hazard specialty, you can get an instant online quote here. If you are a larger company, or looking for something more specialized or need higher limits, give us a call. We can usually quote this type of professional liability in as little as 1 or 2 business days.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.