How do I handle a client who insists I carry insurance just for them?

By mcleanit ·
I have a unique client who is part of a larger organization but the project I'm involved in is separate from the rest of the enterprise and outside the jurisdiction of their IT. That's where I come in. I inherited this project from a consultant who retired and passed it on to me.

The policy of this client organization is that any contractors are required to carry $5 million of general liability and an additional $5 million of Errors & Omissions insurance (and an additional million added to my car insurance). After getting an initial quote from an insurance broker it became obvious that the cost of doing business vastly outweighed the income it would provide. The project is fairly small (3 servers) and the client refuses to enter into a service contract or regular maintenance schedule (so far). It should be noted that none of my other clients require insurance.

My predecessor escaped this policy altogether somehow by playing the "I'm retiring soon" card and it worked. No such luck for me.

So I took this information and I used it to negotiate a new contract and the organization conceded that this project was unique and didn't require the same level of insurance as their regular projects.

Which brings me to now. The revised contract states the amount of insurance coverage is at my discretion.

Great, right? Maybe not.

For the last 7-8 months I've already been doing the work (but am unable to bill for it until I have a signed contract) and in that period have only covered 1/2 of the lowest insurance rate available. So if i project that into the future, it means that it would take me 14-16 months to recover the costs of 12 months of insurance.

I'm curious what my acceptable options are in a realistic business world. Do I drop the client? Do I try to convince them to enter into a service agreement that pays me minimums enough to cover that insurance? Do I push once more for a service agreement?

I'm debating the ethics of charging a client for the insurance they require, when technically, the insurance would cover all my clients.

Any thoughts or advice?

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All Answers

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by cmiller5400 In reply to How do I handle a client ...

That's some serious dough there! If you don't mind me asking, what kind of equipment are you working on? Short of a massive mainframe or a supercomputer that's a heck of a lot of insurance money for servers!

If they require a specific level of insurance, I'd include it in the price of the contract. Why should you bear the cost of the policy since they are requiring a massive policy for the contract? No need for you to go broke because they have insane insurance levels.

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by mcleanit In reply to How do I handle a client ...

That's the funny part: it's 3 computers. 1 workstation, 1 RDP server and 1 SQL server. They're basically glorified desktop computers. The"server room" is more of a re-tasked cloak room. The perceived "value" of the project has more to do with the information (and sensetivity thereof) in the MSSQL database.

I just spoke again with my insurance broker and if i get the absolute minimum available insurance for this, then i would just break even over the course of a year.

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by seanferd In reply to How do I handle a client ...

Ask them to find anyone else willing to do projects, especially with no long-term contracts, with such required insurance.

If the data is so bloody sensitive, they should be compensating you enough to afford such insurance, especially when said insurance only applies to you when working for them. Basically, I'd say they are nuts, and that their own insurance should be covering their data. If they have vetted you, and you already have the equivalent of being licensed and bonded, the onus should be on the client. (Or they should offer you commensurate compensation and a long-term contract.)

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Revise your bid for the job.

by dldorrance In reply to How do I handle a client ...

New bid. Add in the insurance costs plus a reasonable profit. If that prices you out the field, so be it.

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I would personally go with the above answer

by OH Smeg Moderator In reply to How do I handle a client ...

If they want that type of Insurance Cover they have to expect to pay a higher price for the work.

I'm supposing that they didn't tell you about this when you began and dropped it on you well after the event started so as they changed the rules you are entitled to change the price of the work.

Give them the option to either get someone else who has the necessary insurance which as here I'm supposing it's software development related work, isn't covered by any Insurance that I have ever seen, just like M$ can not be sued for faulty software or give them the option to pay in commiserate with the Coverage that they require.

After all they want this type of Insurance they have to expect to pay for it.

No sane person performs work for more than they expect to get paid for doing it after all. Also give them a bill for the work performed so far. If they changed the rules they broke the contract end of story.


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by Marc Jellinek In reply to How do I handle a client ...

Never do work for a client without a way to get paid.

From your post:
"For the last 7-8 months I've already been doing the work (but am unable to bill for it until I have a signed contract)"

It looks to me like you are going to lose the money associated with 7-8 months of effort. That's a huge loss. Hopefully you have a long thread of emails where you can document that you were doing work at the customers request and there is some discussion of an agreed upon rate.

It looks like you are going to have trouble getting paid.

Add on to it an unanticipated cost (insurance). If I were a paranoid conspiracy theorist, I'd say that your client threw this at you suspecting you wouldn't be able to acquire the insurance necessary and have to walk away from the billables.

The insurance requirement is NOT unusual when dealing with large companies. You aren't covered by their insurance.

If one of those servers drops on your foot, who is paying for your medical care and lost wages?

If one of those servers drops on your head, killing you, who is paying your family?

In the case of a workplace injury without clear liability coverage, there is the possibility of a lawsuit brewing. If you have your own insurance, it lessens (but not eliminates) that possibility. That's what the company (and their policy) is looking to eliminate.

If the costs associated with providing service to a client are larger than the billables you can earn from the customer, you are going to lose money. If the profits aren't large enough, you are effectively signing on to earn peanuts. A huge contract (say $1 million) sounds great. But if it's going to cost you $1.1 million to provide the agreed-upon services, it's bad business for you.

I do NOT perform work for clients without a signed contract. I may provide small services (say a maximum of 10 hours) in order to build good-will, but if there is no agreement to get paid... then I'm not getting paid.

There is an old saying in poker: "If you can't find the sucker at the's you"

There is more to being a consultant than knowing how to provide technical services. You have to know how to get paid for providing those services. You may have to learn to walk away from bad business.

Some consultants will get a retainer up front, then bill against the retainer. That means you get paid FIRST, then you bill against the amount you've been given. Some customer will work on this basis, some won't.

Other consultants will bill against a contract, then wait the 30-90 days to receive a check from their client. In this case, the consultant is taking the risk of not getting paid... and that risk premium is built into their billable rate.

Take a look at other industries: car repair and home repair/construction.

In the case of car repair, some mechanics will expect to be paid up front (at least for parts), with final bill due at the time your car is returned to you. If you don't pay, you don't get your car (and they can charge you for storage). They are assured of getting their money. At the worst case, they can seize your car (a mechanic's lien) and sell it in order to recoup their money.

In the case of home repair and construction, most will ask for at least the cost of building materials and a portion of the labor charge up front. They won't start major work until they have at least a portion of cash in hand. They still run the risk of not getting paid for the remainder of their work, but at least their cost of supplies is covered.

In consulting, you have almost no recourse other than a lawsuit. If you don't have a contract, it becomes very difficult to get paid. If you have no documentation of the customers requests and your efforts to fulfill those requests, it can become impossible to get paid.

I'm sorry, but I think you have just learned an expensive lesson.

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Not that bad

by mcleanit In reply to How do I handle a client ...

I don't believe I will have any problems getting paid. I should clarify a bit more.

This project started out as a pet project of a doctor and he had a choice of operating under the confines and jurisdiction of the hospital's IT. Being aware of the red tape involved in operating within those confines, he decided to fund it privately which allowed him greater freedom to adapt the project as necessary.

Years later, the hospital now recognizes the value of the project and the information collected is now being integrated and shared with the rest of the hospital.

So now the project is funded by his department which comes through the hospital's board of directors (how that all works is a bit beyond me at this point). So although I deal directly with this Doctor, the money comes from this red-tape laden organization. In good faith I've been performing tech support and administration work on these servers while the organization gets the contract in order. The contract is in my hands but as I said, even the minimum insurance amounts are prohibitively expensive.

If I walk away from the project I have no doubt I can get paid for the work performed thus far. I just don't want to walk away if I don't have to and I wanted to know if it was appropriate for me to lay all my cards on the table to this doctor and explain the situation from my perspective. Although the hospital foots the bill, he is in charge of his department's expenses so he's still the man to speak to. Perhaps if we established a regular checkup on the servers to recover my costs (and serve the added purpose of preventative maintenance which is to their benefit). The insurance requirement isn't his policy, just that of the organization he works under. The insurance requirement wasn't exactly a surprise, but the cost of it was.

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Reponse To Answer

by Marc Jellinek In reply to Not that bad

Glad that you have a strong executive sponsor. The fact that this is happening in a hospital also clears up the reasons behind the the insurance requirement.

Here's a curveball they haven't thrown at you yet... and it's a big one. If you are in the US and deal with any personally identifiable information (PII) dealing with healthcare, you are probably going to have to go through a HIPAA certification/audit process.


Here's somethings to consider:

If the contract is work-for-hire, they own your software, including source code. That can potentially make HIPAA certification their problem (and their expense)

If the contract is not work-for-hire, you still own the software (and can re-sell it to other hospitals). That makes HIPAA certification YOUR problem and YOUR expense.

Consider asking the hospital if they will provide for the HIPAA certification/audit while you retain full ownership. In return, they would receive a perpetual license (ie: one-time payment) to the software (maintenance should still be an extra annual expense).

You would also require that they provide Board-level recommendations and introductions to other area hospitals. People who sit on the boards of one hospital or run a department will often have deep contacts into other hospitals. Leverage those relationships and you can recoup your investment with sales to additional hospitals.

Best of luck to you!

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Ya me to

by mstoumba In reply to How do I handle a client ...

I have had this problem in the past and had to walk away. Only large vendors such as IBM could provide this. I would have lost money and no other of my customers required it. You could also sub-contract under someone else that may be bigger than you just to keep the client.

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Easy way out

by rcfoulk In reply to How do I handle a client ...

Are you a schedule C operation or LLC or other corp? That partially influences where you go. You might speak with your insurance broker about the coverage afforded by a personal umbrella. Usually $1M is very affordable and this might work except for errors and omissions. If there is not an inexpensive option you have two ways to go: negotiate for no insurance or they pay the coverage. Needless to say you can't work for free. I'm a little worried over the culture of the organization that's requiring this for such a project. Other considerations would be the reference value of the consult and frankly the income impact of dumping the client. As others have said, never, I repeat NEVER, work without being able to bill at least monthly for hours or at minimum 1/3 up front, 1/3 at mid-project benchmarks and 1/3 at completion. The way you have preceded they have you by the short hairs.

If they won???t budge they might find what someone else suggested, that nobody will meet that requirement for the scope and value of the project in which case you would have a leg up since you already are familiar with the work.

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