Launching and maintaining a small business is no small task. Figuring out services, inventory, location, taxes, outreach, and goals can quickly drain your resources – both emotional and financial. And if your budget is tight, you may think about making a few cuts.
Say, for example, that you're a wedding photographer. Maybe you start thinking that Professional Liability Insurance premium would put back a nice chunk of change in your bank account if you canceled your policy. You've never received a complaint before, so maybe you don't need it after all, right?
So you cancel your policy. For a few months, you're glad to have that money back in your pocket. Business is good, and you're on cloud nine. You're even thinking about hiring an assistant. Then one day, you find out a former client has filed a lawsuit against your business. What's worse: you no longer have photography business insurance to cover it. All those good feelings come crashing down.
What happens next?
Out-of-Pocket Litigation Can Leave You Penniless
The couple alleges you neglected to capture every magical moment of the special day, particularly their first kiss. They sue you for $5,000 for failing to meet the value of the photography package. Your photography business could be facing a serious financial hardship. You need to pay for…
- Lawyers' fees. And it won't be cheap. Hourly rates for attorneys can range from $150 to $350 per hour.
- Court expenses. Fees for copying, filing, and other miscellaneous tasks all add up.
- Damages or settlements. Even if you try to reach a settlement with the couple, they might prefer to go to court. If they win, you could owe them a portion or all of the $5,000 they're asking for.
You know what could have covered all these expenses? That's right: Professional Liability Insurance. But without an active policy, all these costs must be paid out of pocket, even if your policy was in force when the wedding took place.
Most Professional Liability policies provide only “claims-made” coverage, which means your policy must be active when the alleged incident occurred and when the claim is filed to receive your benefits.
Frivolous Lawsuits Cost Money, Too
Okay, let's imagine a different scenario for your hypothetical photography business. The couple suing you for allegedly missing their first kiss has no case. You have digital copies of the captured kiss to prove it. Though the lawsuit doesn't have much of a leg to stand on and may ultimately get thrown out, it's still going to cost you a pretty penny. Why?
Though a lawsuit may be frivolous, you still have to respond to it. And most of the time that means you must hire an attorney. Your attorney must file a motion to dismiss the case, and their time and expertise costs money – usually $2,000 to $5,000, according to the US Chamber Institute for Legal Reform.
That's a lot of money to pay out of pocket. Small-business owners surveyed by the Small Business Administration reported legal costs for actual litigation ranged from $3,000 to $150,000, and only one-third of owners reported spending under $10,000.
There's More at Stake Than Money
Your finances are stretched thin because of the lawsuit, but you've got other problems piling up, too. When news spreads about the pending lawsuit, you risk…
- Losing prospective clients. Potential clients might begin to question the integrity and value of your work. And if something does go wrong, you don't have the insurance coverage to back it.
- Ruining your reputation. They say there's no such thing as bad publicity, but when your business's credibility is called into question, it can be difficult to earn back the trust of your clients.
- Facing more lawsuits. The client suing you may have just opened a can of worms. If other clients decide they're unhappy with your work, they could file lawsuits against your business, too.
Professional Liability Insurance can cover errors, mistakes, and oversights with your work, but it can also add a foundation of trust and guarantee your work for future clients.