Professional liability insurance can offer you, as a consultant, protection from accusations that you didn't fulfill your obligations on a contract. Meredith Little tells you where to find it and strategies for figuring your premiums.
As a consultant, it’s likely that you may consider buying professional liability insurance. In some instances, such as subcontracting jobs, you may not even get the work unless you’ve purchased professional liability insurance.
In this article, I’ll cover where to find liability insurance, how much it will cost, and some strategies that could help you save money when shopping for a policy.
Second of two articles
Last week’s article looked at ways that professional liability insurance, also known as errors and omissions insurance, can protect your business.
Where to look
If you carry other types of insurance, such as homeowners or a general liability insurance policy, check with your insurance provider. If that company offers a professional liability product, you may be able to buy it at a discounted rate. A disadvantage of this approach is that your provider may offer only one product. If you don’t like the coverage or the premiums, you’ll be out of luck. If your company doesn’t offer what you need, ask for a referral to another company or an independent agent who might.
The advantage of working locally is that if you have a problem or you need to file a claim, you can easily check in with your agent in person, which can be more difficult with an agent you’ve found through a Web site.
That said, you can find legitimate companies on the Internet that offer professional liability insurance. Here’s a summary of the best sites I found that offer not only products but also information:
- Techinsurance.com: This company offers a number of insurance products specifically for computer professionals. You’ll also find helpful information, including the Sample Quotes page, which lists average quotes for three business situations: Independent Contractor/Web Designer, Small Consulting Company (up to five programmers), and Large Consulting Firm.
- Tennant Risk Services: Offering coverage for what it calls “technology and cyber risk,” Tennant Risk Services is a wholesale underwriting broker. It doesn’t sell you insurance directly but can refer you to a broker who can; it’s licensed in all 50 states. This site provides comprehensive information about the nature of professional liability insurance and its advantages and constraints when it comes to protecting the IT professional.
- The Small Business Insurance Center: TSBIC provides insurance specifically to IT consultants, Web designers, Internet service providers, and software developers. You can use the site to get a quote and inquire whether TSBIC's agents are licensed in your state.
Regardless of which company you decide to use, research the company’s background. Ask to see its industry ratings, including a review of its claims payment history.
What does it cost?
The cost of professional liability insurance varies, but considering the current economic climate, you probably won’t think it’s cheap. Premiums generally start at about $1,000. The quotes I received from a number of insurance companies ranged from $1,000 to $1,450 for a standard policy that covered me for $1,000,000 for each claim and up to $2,000,000 per year.
Premiums also vary depending on your revenues, the number of employees in your organization (I have none), your location, the limits and deductibles you choose, and your risk factors. Remember that your costs for insurance are deductible as a business expense, so the out-of-pocket cost isn’t as shocking as it might seem.
Factors affecting your risk (and your premium)
Your premiums will vary depending on your business. (As a documentation specialist, I seem to be in a fairly low-risk category.) Factors that affect your risk and your premium include the following:
- Experience: Several of the applications and quote request forms that I found required much more detail from applicants who’ve been in business for less than three years. Presumably, the less experience you have, the more risk you present.
- Types of clients: If you deal with clients who have a lot to lose (e.g., a company that processes a high volume of financial transactions), you’ll have more on the line if they decide you’ve cost them money.
- Services provided: If you develop mission-critical software, your risk will be higher than that of someone who provides auxiliary services.
You can reduce the cost of liability insurance in a few ways. First, buy only what you need. Some policies include coverage for the following, while others quote it separately. Make sure you understand what’s included, what’s priced separately, and what you can opt out of:
- Property: This covers your equipment and other business property in the event of loss, theft, or damage as simple as a spilled soda on a keyboard.
- General liability: This protects you from claims of bodily injury and property damage.
- Virus liability: This protects you if a client experiences damage caused by a virus that it claims your solution introduced. This is one of the more optional coverages. For example, I don’t need it as a technical writer—none of the solutions I provide are vehicles for viruses.
- Intellectual property coverage: Also known as patent infringement protection, this coverage protects you in the event that a client accuses you of stealing a technology or even an idea.
You may find it most cost-effective to break down the coverage you need into separately priced components and buy what you need from different companies. In particular, I found that the property and general liability policies offered by the same companies that quoted me the professional policies were more expensive than I could obtain elsewhere. Unlike the other coverage, these aren’t specialized, so you don’t need to go to a specialty company for them. I was able to obtain both these coverages at a far reduced rate through the same company that provides my homeowners and automobile insurance:
- Because I work out of my home, I was able to purchase a personal articles policy as an adjunct to my homeowners insurance. It covers my business equipment up to $10,000 for $32 a year, even if the damage occurs elsewhere.
- Similarly, dependent on carrying automobile insurance, I was able to obtain a personal liability umbrella policy for $116 a year that covers me for suits alleging bodily injury or property damage in the course of my business activities.
That totals $148 per year. In contrast, Techinsurance.com quoted these two coverages combined at $602 a year. Granted, it covered property at a higher amount, but $10,000 is all the coverage I need. The general liability limits were the same: $1 million. Your company’s legal status also matters here; I couldn’t have purchased the policies this way if my business were incorporated. (I operate as a sole proprietor.)
Unfortunately, there doesn’t seem to be any easy way of reducing the cost of professional liability premiums. But once you know the facts, you can easily sign onto a policy if clients require it before you begin working with them or if you take on a high-risk client with a high-powered legal department.
Has errors and omissions insurance saved you?
Have you encountered a situation in which E&O insurance helped you? Post your comments below.