Professional Liability Insurance for Consultants

Professional liability insurance for consultants is a type of business insurance that protects consultants from the risks of providing professional services to clients. Unlike advisers who may work with a business over the long run, consultants are usually hired to address specific problems, deliver results or offer expert opinions. However, there are instances where things may go wrong and clients may not be satisfied with the outcome. They may even sue the consultant for negligence or mistakes. This is where professional liability insurance can prove to be extremely useful.

What Is Professional Liability Insurance for Consultants?

Professional liability insurance is a type of business insurance that protects consultants against claims of negligence, errors or omissions in their work. It covers the legal costs and damages that may arise from lawsuits filed by clients or customers dissatisfied with the consultants' results.

Professional liability insurance works by paying for the defense and settlement of claims covered by the policy. The policy generally covers claims made during the policy period, regardless of when the alleged error or omission occurred. However, some policies may have a retroactive date, which restricts the coverage to only claims that arise from work done after that date.

Consultants require professional liability insurance because they are exposed to various risks in the course of carrying out their duties. Professional liability insurance can help consultants avoid or reduce the financial impact of these risks and protect their reputation and credibility. It can also assist them in complying with contractual or regulatory requirements that may mandate them to have this type of insurance.

What Does Professional Liability Insurance Cover?

Professional liability insurance covers the costs related to claims of professional mistakes, negligence or failure to perform your services. It helps protect your business from lawsuits alleging financial harm or injury to clients or customers due to mistakes or omissions. Examples of what it covers include:

• Mistakes, negligence, errors and oversights in your services, like giving incorrect advice, making calculation errors or missing deadlines
• Undelivered services or breach of contract, such as failing to complete a project, not meeting client expectations or violating a non-disclosure agreement
• Personal injury resulting from your professional activities, like defamation, slander, libel or invasion of privacy
• Copyright infringement, such as using someone else's work without permission or violating trademarks or patents

How Much Professional Liability Coverage Does a Consultant Need?

The amount of professional liability coverage a consultant needs depends on the size and type of their business, the industry they work in and the potential risks involved. There's no one-size-fits-all answer, but typical limits range from $250,000 to $2 million or more. Higher limits mean higher premiums but also better protection.

A typical professional liability policy offering $1 million per occurrence and $1 million aggregate coverage implies that it pays up to $1 million for any single claim and up to $1 million for all claims combined during the policy period. 

To figure out how much coverage you need, consider the following:

• The worst-case scenario from a mistake and the cost of defending a lawsuit
• Your average revenue and profit margin and what you can afford to pay out if there's a claim
• Industry standards and your reputation in the market
• Client contracts and any required coverage levels
• Legal and regulatory requirements

Typically, you’ll want to adjust the level of coverage according to the revenues and assets of the business. Insurance protects you when you have assets that can be taken away. The ultimate objective is to balance protection with affordability based on the consultant's specific situation and needs.

What Happens When Consultants Do Not Have Professional Liability Insurance?

Not having professional liability insurance can put consultants at serious financial and legal risk. 

• Attorney fees: If a client sues for mistakes or negligence, the consultant needs to hire a lawyer, which can be costly. Without professional liability insurance, the consultant will have to pay the fees out-of-pocket, which might be costly, especially for complex or prolonged cases.
• Court costs: Consultants might have to pay for filing fees, expert witnesses, arbitration fees and other court-related expenses, straining their cash flow.
• Defense expenses: Even winning a case or settling out of court can lead to expenses like investigation costs or settlement negotiations.
• Damages: Consultants might have to pay for damages claimed by the client, like lost revenue or corrective costs. These expenses can be huge and may surpass the consultant's assets.

Professional liability insurance helps cover these costs so that you can pay for legal assistance during a lawsuit. 

Other Insurance Coverages Consultants Might Need

In addition to professional liability insurance, consultants may require other types of coverage to safeguard their business from various risks. Here are some examples.

Commercial Auto

Commercial auto insurance covers vehicles used for business purposes like visiting clients or making deliveries. It also helps with vehicle repair or replacement costs and covers medical and legal expenses in case of an accident.

Business Owners Policy (BOP)

This is a bundle of insurance policies, including commercial property, business interruption and commercial general liability insurance. It covers the costs of property damage, liability claims and lost income from events like fire, theft or natural disasters.

Cyber Insurance

Cyber insurance tackles costs associated with recovering from cyberattacks such as data breaches, ransomware or phishing. You may be able to recover expenses for data restoration, customer notification, credit monitoring and legal defense.

Workers Compensation

Workers compensation provides medical and wage benefits for employees injured or becoming ill from work activities. If an injured employee sues the employer, payments for treatment costs, lost wages, disability and legal fees may be covered.

How to Choose the Right Professional Liability Insurance Policy for Consultants

Selecting the right professional liability insurance policy for consultants involves considering several key factors:

• Coverage limits: The maximum amount the policy pays for a single claim and all claims during the policy period. Consultants should pick limits that match their potential risks and damages.
• Exclusions: These are situations not covered by the policy, like intentional acts or criminal behavior. Consultants must understand what the policy doesn't cover.
• Deductibles: Deductibles are the amount consultants pay for a claim before the policy kicks in. A higher deductible can lower the insurance premium, but it also increases the out-of-pocket expense in the event of a claim. They should choose a deductible they can afford, balancing it with premium costs.
• Retroactive dates: When the policy starts covering acts or omissions. The policy does not cover claims resulting from events before the retroactive date. Changing this date can affect coverage, so consultants should maintain it when renewing or switching policies.
• Insurer's reputation: Consultants should pick an insurer known for reliability, financial stability and good customer service. Checking ratings, reviews and complaints can help assess the insurer's reputation.

Benzinga’s Best Professional Liability Providers for Consultants

Benzinga has identified the best professional liability providers for consultants, offering comprehensive coverage and protection.

Protect Your Small Business With Professional Liability Insurance

Professional liability insurance for consultants helps cover the costs associated with defending and settling claims of professional errors, negligence or failure to perform your services. This type of insurance also protects your reputation and credibility in the competitive consulting market. Evaluate coverage limits, exclusions, deductibles, retroactive dates and the insurer's reputation when choosing the best coverage for your specific situation. Depending on your business needs and risks, you may also require other types of insurance, such as commercial auto, business owner's policy, cyber insurance or workers compensation. With adequate and appropriate insurance, you can focus on delivering high-quality services to your clients and growing your consulting business with peace of mind.

Frequently Asked Questions