Chapter 2: Understanding Small Business Insurance for Independent Consultants
Part 3: Essential Insurance Policies for Marketing and Management Consultants
Professional Liability / Errors and Omissions Insurance
To protect your personal assets and remain self-employed, you'll want to carry Professional Liability Insurance (aka Errors and Omissions Insurance). E & O coverage protects you in the event that a client is unsatisfied with your work and sues for compensation. E&O policies typically cover legal defense costs, settlements or judgments, expert witness fees, and more.
The best part? Errors and Omissions coverage protects your business even if the claims are unfounded, a situation that happens to small businesses more than you might realize. According to a report from the U.S. Chamber Institute for Legal Reform , frivolous lawsuits can still cost $2,000 to $5,000 (or more) in lawyer's fees before being dismissed.
Errors & Omissions Insurance can cover lawsuits alleging your consulting business…
- Made mistakes and oversights while rendering services.
- Provided shoddy or incomplete work.
- Was professionally negligent.
- Failed to provide contractually obligated services.
Frivolous lawsuits can cost consultants between $2,000 and $5,000.
So what does an E&O claim look like in action? Let's take a look at a couple examples.
E & O Lawsuits: A Case Study for Management Consultants
An auto parts dealer hires a management consultant to help with staffing, company organization, and budgets. The consultant implements a reorganization strategy that creates new spending controls and a staffing model.
However, after twelve months, the client's bottom line is suffering. To compensate for losses, the client sues the consultant for the "negligent strategy" that caused lost profits.
The case was settled but at a substantial cost to the consultant:
- Settlement: $150,000.
- Legal expenses: $75,000.
- Grand total: $225,000.
E & O Lawsuits: A Case Study for Marketing Consultants
A clothing store hires a marketing consultant to assist with advertising sales on its website — specifically, the promotion of an upcoming annual sale. The marketing consultant agrees to complete the marketing materials by a specific date and to send out emails about the sale through the new website.
Unfortunately, the marketing consultant forgets to send out the email on time, which results in thousands of dollars in lost profits for the storeowner. As a result, the storeowner sends out a demand letter for compensation because of the consultant's negligence, which results in these expenses:
- Settlement: $64,000.
- Legal expenses: $30,000.
- Grand total: $94,000.
For both of these cases, the silver lining is that the defendants had sufficient Professional Liability / E&O Insurance to cover the high cost of the settlements and their legal defense. Without the coverage, these independent consultants could have ended up in severe debt or with liens for their private property.
Professional Liability Insurance gives you an extra layer of protection against the unexpected turns your projects take. And even if a claim doesn't hold water in court, you have coverage for legal expenses, which can be enough to jeopardize the future of a small consultancy.
What Is Claims-Made Coverage?
Errors and Omissions Insurance is typically written as "claims-made " coverage. This means you can only receive the benefits of your coverage if you meet two conditions:
- Your policy is in force at the time of the alleged incident.
- The same policy (or appropriate endorsement) is active when the claim is reported.
Your insurer specifies which actions constitute a claim. For some, a conversation with a client about your negligence constitutes a claim. For others, legal action must be taken before something is considered a claim. As a rule, you'll want to inform your insurance provider as soon as you receive notification about an incident that could be covered by your E&O Insurance.
So let's say, for example, you forgot to send out the annual sale email to your client's customers on December 1, 2008. However, the client waited until February 1, 2009 to notify you that your error cost them $64,000 in lost profits and marketing expenses. Finally, the storeowner files a suit against your consulting business on July 1, 2010. This claim would be covered by:
- A claims-made policy covering 2009, IF the policy covers potential claim notices AND the policy's retroactive date is no later than December 1, 2008.
- A claims-made policy covering 2010, IF the policy defines claims as those initiated by a third party with a demand for money, AND the policy's retroactive date is no later than December 1, 2008.
As the icing on this many-layered cake, there are two types of claims-made coverage: pure claims-made policies and claims-made and reported (CMR) policies. Here's the skinny on both:
- Pure claims-made policies. This is the more lenient of the two options. As long as the claim happens during the life of your Professional Liability policy, you're covered if it's a pure claims-made policy. You don't have to report the claim during your policy term to receive coverage, but you must notify your provider as soon as you catch word about a possible claim.
- Claims made and reported policies. These policies require you to report claims within the timeframe of your policy's term. If you fail to report the claim within this timeframe, you won't receive coverage for the incident.
No matter which kind of policy you ultimately choose, the important thing to remember is that you must carry Professional Liability Insurance continuously. If you start and stop coverage, you risk paying for these lawsuits out of pocket.
In order to ensure protection, you must carry Professional Liability Insurance continuously.
Claims-made coverage can be pretty confusing. That's why our agents are happy to answer your questions about how a claims-made status affects your E&O benefits. Just give us a call at 800-688-1984.
What Do E & O Policy Limits Look Like?
Your E and O policy uses two terms to discuss your coverage amounts: the individual limit and the aggregate limit. Here's what these terms mean:
- Individual limit. The maximum amount your policy pays for any one claim.
- Aggregate limit. The most that your provider pays in any policy term for all claims combined.
Your policy will likely list the individual limit first, followed by the aggregate. It may look like this: $1,000,000 / $2,000,000. For this particular policy, you receive a maximum of $1 million per any one claim. You cannot receive any more than $2 million during the term of your policy.
Next: Umbrella Liability Insurance