Whether acting as an independent contractor or a sole proprietor who works from home, your professional liability risk is real. Your freelance work may even make you a target if the business you contract with gets sued. How does that work?
Let’s say you work fulltime for a marketing firm as its resident IT security expert. To make a little extra money, you also take on freelance IT consulting work for other companies. One of your clients uses third-party software for their network security based on your advice. Here’s where things go wrong:
- The client is hacked through their wireless network because the software you recommended had a security defect and exposed their customers’ data.
- The client is sued over the breach.
- To recoup losses, the client sues the software developer and you, their IT consultant.
Hold on a minute. You only recommended the software, you didn’t make it. Why are you liable? In a nutshell, you presented yourself as an IT security expert, so the client can argue you should have reasonably known the software could have serious security flaws. (Related reading: "3 Professional Liability Lawsuit Examples.")
Even if you’re just moonlighting or doing work on the side, you have the same professional liability exposure as a “real” business with employees and an office. The same goes for consultants and contractors who work fulltime for themselves.
To give you a fuller picture of your professional liability risk as a freelancer or sole proprietor, let's look at some another example.
Case Study: Freelancers and Professional Liability Risk
In this scenario, let’s say you’re a freelance graphic designer. You have a large portfolio of clients and take on multiple jobs per month. In short, you’re a multitasking busy bee.
One of your clients, a local coffee shop, calls you up and asks for a new advertisement detailing a limited time offer for 10 percent of a cup of coffee to those who bring the flyer in. You design the mailer and send the file to the client without checking it over (you’ve got another project deadline looming). The coffee shop sends the flyer to get printed and mailed out.
The café experiences an unprecedented influx of customers with flyers demanding free cups of coffee. Turns out, the ad had a typo – it said, “Bring this ad in for 100 percent off your next cup!” Infuriated, the owner threatens to sue you over lost revenue from the extra zero you accidentally typed plus the money he spent on printing incorrect flyers.
As a freelancer, you’re the only person behind your small business, but you still have professional liability risk, just like a large graphic design agency.
Why Sole Proprietors and Subcontractors Need Professional Liability Insurance
You may think you don’t need a Professional Liability Insurance policy if you’re hired as a subcontractor. The business hiring you has insurance that covers you, right? Not necessarily.
In most cases, a contractor's Professional Liability policy only covers their employees – not their subcontractors, which are viewed as separate business entities. Your contracts might even stipulate that you have your own insurance coverage to address potential work mistakes. For more on that, read "Is Your Small Business Required to Carry Professional Liability Insurance?"
Similarly, if you’re an independent contractor running a home-based business, any errors or mistakes you make put you at risk just like any other business. The difference may be that you don’t have the same financial means as a bigger business to defend yourself against a professional liability lawsuit.
Fortunately, a Professional Liability Insurance (aka Errors and Omissions Insurance) policy offers sole proprietors a more level playing ground in the form of the financial protection. In the event of a professional negligence lawsuit, your policy can pay for:
- Legal defense fees.
- Court costs.
- Settlements or judgments.
Still not sure if you need an E&O policy as a sole proprietor? Talk to Insureon’s agents who can help you decide what insurance your small business needs most.