Consultants are tasked with boosting the fortunes of other businesses, which often means there are high expectations to deliver results. In this high-stakes environment, clients depend on the advice of consultants to drive their vision and improve their prospects. Any mistake can hamper business growth for the client and have lasting effects on the future of their company. While many clients may simply cut ties with a consultant if things go wrong, others may seek damages through legal channels if they think your consulting business is at fault.
With proper E&O insurance, your firm is protected from financial loss if it is sued by a client following perceived mistakes. Among the benefits of errors and omissions insurance is covering the cost of lawsuits and paying any settlements or judgments made against your company.
Whether you are an independent consultant or a major organization, potential legal action against your business is the main reason you should seek out errors and omissions insurance. It is worth noting that professional liability insurance is not required by law in the United States, although this coverage should be on the radar of any consulting firm.
Consider this example: A client hires your consulting firm to create a strategic plan for expansion. Your firm prepares a detailed, well-researched plan and completes your consulting engagement. The client attempts to implement your plan, but they do a poor job of implementation, and the expansion fails, costing them millions of dollars. One year later, the client sues your consulting firm for their lost profits. In this situation, your E&O insurance would provide financial protection against your client’s legal claims.
What Errors & Omissions Insurance Covers
As a consultant, you should view errors and omissions insurance as a required investment, not least because the fabric of your business is based on the consultant-client relationship. Sometimes that relationship can fracture, and your client’s perception of your performance could result in a lawsuit if they do not receive the results they expected.
It is worth noting, in most cases, legal action is not necessarily a reflection on the quality of your work. Either way, whether you truly made a mistake or not, having errors and omissions insurance protects you. Importantly, consultants should ensure their policy is always active as clients have the ability to take court action months and even years after a contract has ended.
As with all insurance products, policies differ from one insurance provider to the next, making it important to read policy details carefully and understand what protection the policy offers. However, most standard errors and omissions insurance policies will protect your consulting business against the following situations:
- Work mistakes – Mistakes happen, but in a business environment mistakes can cost clients money, time, and hard work. Equally, some clients have unrealistic expectations and take legal action even if you performed flawlessly. In both situations, errors and omissions insurance protects you.
- Miscommunication or differences in expectations – Even if you fulfill tasks as stipulated by the client, common problems can arise, ranging from miscommunication to missed deadlines. If these everyday situations cause a client to lose money, they may seek compensation through the courts. Errors and omissions insurance can provide a layer of protection against these commonly encountered work situations.
- Legal fees – Even if you did nothing wrong, going to court to protect your consulting business can be a costly pursuit. You may eventually win, but in the meantime, you will have to pick up the cost of legal representation, which can cost up to hundreds or even thousands of dollars per hour. Other legal costs include paying expert witnesses, administrative costs, and court fees. With a good professional liability insurance policy, you will have help covering your legal fees.
What E&O Insurance Does Not Cover
An important part of understanding your professional liability insurance policy is knowing in what situations you will not be covered.
- Intentional wrongdoing – Under almost all circumstances, intentionally causing damage to a client is not covered by errors and omissions insurance.
- General liability – Errors and omissions/professional liability insurance does not cover you when a normal accident happens. For example, if a client is visiting your office, and she slips on a wet floor, the accident would not be related to the services you offer. To cover this kind of situation, your business will need general liability insurance.
- Illegal practices – Your consultancy will not be protected if you broke the law in the process of the incident from which legal action arose.
- Employee injuries – Similar to general liability, an employee injury is outside the limits of your professional service and not covered by errors and omissions insurance. Instead, you will need a separate workers’ compensation insurance policy.
- Workplace disputes – While errors and omissions insurance protects your firm against a broken relationship with a client, sometimes the damage comes from within your business. Errors and omissions insurance will protect you if an employee makes a mistake on behalf of your company but offers no protection if you are in dispute with employees over an internal matter. Examples of employee disputes include discrimination accusations and pay issues, both of which would be covered by employment practices liability insurance.
Limit of Liability
When searching for the best policy for your consulting business, you will face a significant choice: what should your limit of liability be? The limit of liability is the maximum amount of money that your insurance company will pay in the event of a claim. The higher the limit of liability, the more coverage your business will have, and the more expensive your insurance premiums will be.
The limit of liability is typically assessed as a per claim/aggregate. This means you select a limit of liability, for example $3 million per claim / $3 million aggregate. Under these terms, you will receive a maximum coverage of $3 million for any claim you make. However, the aggregate means the insurance company will only pay this amount in total (in our example, $3 million) per policy year. In other words, if a single claim or multiple claims exceed the aggregate, the insurer will not cover the cost above $3 million.
A deductible is the total your consulting firm will need to pay if it experiences a loss before the insurance company’s coverage goes into effect. When you purchase errors and omissions insurance, you will be able to choose your level of deductible, with the insurer offering different amounts.
At its core, a deductible’s purpose is for you to share some of the risk with the insurance company and this ensures you work extra hard to avoid mistakes that would result in legal action against your consultancy.
Of course, there are no guarantees you can avoid those situations, which is where the risk element of deductibles comes into play. Still, it is worth noting that many insurance companies will offer a deductible of $0, meaning you will never have to pay out on a legitimate claim before the policy is enacted. This sounds good, but lower deductibles drive up the cost of the insurance premium.
The higher the deductible you choose, the lower your premiums will be.
Deductible example: Your consulting business has a deductible of $20,000, and a client makes a legal claim that would settle for $200,000. Under these terms, your company would pay $20,000 of the claim, and the insurance company would pay the remaining $180,000.
Errors and omissions insurance policies are claims-made policies. Essentially, this means they are claims-based, and coverage only triggers when you file a claim. The opposite of claims-made coverage is occurrence-based, which triggers coverage when an accident or event occurs (think of auto insurance), instead of when reporting of the claim.
While it may seem like an insurance industry technicality, it is worth noting what claims-made policies mean. With that in mind, it’s probably best to look at an example:
Your consulting business holds E&O insurance through the calendar year for 2018, and you worked with a client through 2014. That client has now returned with legal action against your company, stemming from the work contract in 2014. Even if your business was protected by E&O insurance in 2014, the claim would be made against your 2018 policy.
Claims-made policies help you if a client returns years down the line, but they can also cause problems. If a claim is submitted after a policy expires, your business will not be protected even if you had E&O insurance when the incident that caused the legal action happened.
For claims-made policies, an important concept to understand is the retroactive date. This date, which is specified in your policy, tells you the earliest date that work your consulting firm has performed will be covered. Any work done before the retroactive date will not be covered, even if you currently have active coverage.
Consider this example: You have a currently active E&O insurance policy with a retroactive date of January 1, 2014. Any work you performed before this date will not be covered, even though your policy is currently active.
Ideally, you want to set your retroactive date to the first date that your consulting business started to have clients, which would protect all the work you’ve done. If you drop your E&O coverage or have a gap in coverage, you may lose all insurance protection for the work you’ve done in the past.
Extended Reporting Period
Many E&O policies come with an extended reporting period, which gives you additional time to report claims for work performed while the policy was still active. This period is commonly 3-6 months.
Consider this example: Your policy ends on December 31, 2017 and has a six-month extended reporting period. You’ll be covered if you file a claim on March 1, 2018 for work performed on or before December 31, 2017. However, any work performed in 2018 will not be covered.
With some insurance policies, you have the option to buy a longer extended reporting period, which can be multiple years or even an unlimited reporting period in some cases. The cost to purchase this extended reporting period is usually priced as a percentage of the original premium from the policy that is expiring.
Changing Insurance Carriers
When you change insurance providers with claims-made policies, it is critical that you have the new policy’s retroactive date set to the same date as your existing policy. If you don’t have the retroactive date set to the same date as your previous policy, you’ll lose insurance coverage for all work performed before the new retroactive date.
If the new insurance company isn’t willing to set your retroactive date to the same as your old policy, then you’ll need to try to purchase an unlimited reporting period from either your old insurance company or on the open market.
If you are closing your consulting firm due to retirement, it’s wise to shop for an unlimited reporting period for your E&O insurance so that you’ll be covered for all the work you’ve done during your career. If you cancel your policy without buying an unlimited reporting period, you’ll lose all insurance coverage for work done before retirement.
If you are retiring from your consulting firm, but your firm continues to operate, you’ll have coverage under their E&O insurance as long as the firm continues to maintain coverage.
The Cost of Professional Liability/Errors and Omissions Insurance
The cost of E&O insurance can vary greatly and can be assessed based on various factors, such as the deductible discussed above. Other determining factors in the cost of a premium are location, size of business, and the amount of coverage needed.
Policy limits drive the cost of premiums, as they determine how much coverage a consultancy receives, based on the per claim/aggregate model. Smaller businesses are best served by selecting a policy limit that accurately reflects their risk exposure.
Naturally, the policies that come with the most coverage will cost more to purchase. That said, there are always ways to lower insurance costs without having to cut corners and leaving your business unprotected.
- Avoid claims – True of any insurance policy, the fewer claims you make, the less you will pay for coverage. If you have been with an insurance company for several years and have not made a claim, your premiums will be lower than they would be had you made claims. The best way to avoid claims is to ensure your business works to avoid mistakes that may lead to a client blaming you for losses.
- Compare quotes – A standard piece of advice in the auto insurance market, comparing quotes also works for errors and omissions insurance. Remember, you are not necessarily looking for the cheapest coverage but rather the policy that offers what you need at the best possible price.
- Choose a higher deductible – As we mentioned, the higher the deductible you choose, the lower your premiums will be. Again, this is a risk as your business will be left picking up more of the cost if a claim is made.
- Bundle policies – Professional liability/E&O insurance is not a one-stop shop of coverage that will provide sweeping protection for all of your consulting business. It is a vital component of an insurance net you need to build. Other important protections include general liability insurance, workers’ compensation insurance, and employment practices insurance. In almost all cases, an insurance carrier will offer a discount to a company that bundles policies together.
Why Consultants Need Errors and Omissions Insurance
Consultants provide a wide range of services to clients with differing needs. Maybe you are a retail consultant helping a client reach their sales goal for a year, or a PR consultant providing advice and services towards expanding the advertising reach of a client. Whatever the situation, the risks involved fall entirely on your consulting business and your specialty.
Some legal claims against consultants are legitimate, meaning a consultancy did make a mistake in their service that cost the client money. Other times, legal action can be frivolous and based on impossible expectations on the client’s part. Whether you cost a business hundreds of thousands of dollars or are defending the reputation of your consulting firm, E&O insurance provides necessary protection. With this coverage, you will be able to protect your business without losing out financially.
Risks of Not Having E&O Insurance
There is enough risk surrounding a consulting business that errors and omissions insurance should be a key investment. However, like any other insurance product, you hope you will never need to make a claim. Sometimes, consultants get complacent and think their business is immune to risk and does not need to be covered by professional liability insurance.
Thinking this way is a huge mistake because the absence of E&O insurance brings far more risks to your business. If a client takes you to court and you have no errors and omissions insurance, your consulting firm may face the prospect of going out of business. The dollars can mount quickly and include legal costs, paying settlements, and paying judgments.
Is Professional Liability/Errors and Omissions Insurance a Requirement?
The quick answer is it depends. Some clients will demand a consultant is adequately insured before agreeing to do business. For the client, the reasoning behind demanding E&O insurance from consultants is based on knowing they will be compensated if your business does something wrong. In many situations, consultants without E&O coverage will be removed from the running by a client deciding which consultancy to choose.
While professional liability insurance is not legally mandated like auto insurance, many clients may demand to see proof of coverage. Think of E&O insurance as simply another investment in your business—something that will add value to the service you provide. Demonstrating that you have proper coverage will signal to potential clients that you take your business seriously.