2014

Professional Liability Insurance

What Is Professional Liability Insurance?

Just as plumbers, carpenters, and repairpersons are "licensed and bonded," tech professionals often have to carry Professional Liability Insurance in case there's a leak in the digital plumbing, so to speak.

Professional Liability Insurance (also called Errors & Omissions Insurance) is a business insurance policy that covers client lawsuits that allege you….

  • Made a mistake or oversight in your technology, code, hardware, etc.
  • Mismanaged a project or missed a deadline.
  • Were negligent in delivering your professional services.
  • Provided shoddy, incomplete, or incorrect work.

So any time there’s a client lawsuit essentially saying “You messed up,” your Professional Liability coverage comes in handy. (Think of Professional Liability Insurance as a complement to General Liability Insurance, which covers lawsuits not directly related to your work.)

Let’s look at how much Professional Liability Insurance costs and when and why IT businesses typically buy it.

How Much Does Professional Liability Insurance Cost?

Professional Liability Insurance costs depend on the size of your business. For example:

  • Freelancers and independent contractors may pay $1,000 to $1,500 per year.
  • Small consulting companies may pay $2,500 to $4,500 per year.
  • A large tech company (with eight-figure revenue) may pay as much as $14,000 per year.

Most of the tech companies that come to us fall on the less-expensive side of that spectrum. The typical TechInsurance customer is a one-person or very small business. Policies for a business that size are typically less than $1,000 a year, or roughly $80 a month.

Why You Might Need Professional Liability Insurance

Why do you need Professional Liability Insurance? If you’re like a lot of IT business owners, your first answer is that a client contract requires you to have it.

But there are benefits to carrying this policy even if you’re not trying to comply with specific contract terms. For one thing, having an active policy helps show potential clients that you’re a legitimate business and you have the financial wherewithal to survive if something goes wrong.

And when certain things do go wrong, you’ll be glad you have coverage in place. For example, your Professional Liability Insurance can come in handy in the event of client issues such as…

  • Scope creep. This is kryptonite for project managers. You agree to a project, but the client keeps wanting you to do more. As the project goes along, the parameters keep changing.
  • Miscommunications. Clients often don't speak tech. You (think you) agree on a project, but when you deliver, they’re confused. This isn't what they wanted.
  • Data issues. Any data issue – whether it's a problem with giving access to the wrong employee, lost data, or a data security incident – could result in an angry client threatening you with a lawsuit.
  • Problems with third parties. Even if you run a one-person business, chances are you collaborate with other contractors or third-party vendors. If a vendor makes a mistake or causes problems, the ax could fall on you. That’s because a common legal strategy when things go wrong is to sue everyone involved and hope someone is found liable for damages.

These issues are real and pressing. Software research advisory firm the Standish Group's CHAOS Project found [PDF] that only 32 percent of projects are delivered on time and on budget. The remaining 68 percent fail, blow their budget, or cross the finish line late.

Given those stats, Professional Liability Insurance is a smart business decision – it protects your business from the inevitable project blunders that can trigger lawsuits.

Packaged Coverage at Discount Rate

-- with the Business Owner's Policy

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Professional Liability Insurance Case Study: Scope Creep

Let's say you're a victim of scope creep. A client hires you to build a machine-learning search module for its retail baby clothing website. You build the module and deliver it to the client, but now the client wants you to update all your code because the business has decided to sell teen clothes as well. This wasn't part of the scope – and no one told you about the business strategy shift.

If the client claims you didn't deliver what they wanted and files a lawsuit against you, Professional Liability Insurance can cover the following expenses:

  • Attorneys’ fees.
  • Damages you may owe the client.
  • A settlement to end the dispute out of court.
  • Miscellaneous court costs.

Lawsuits are expensive – no surprise there. The Court Statistics Project found that the typical breach of contract case costs $91,000.

Given how crucial technology is to your client's business, it's not hard to imagine a scenario when you're paying hundreds of thousands of dollars in legal fees because of a data breach, lost functionality, or another tech snafu that can cripple a business. Professional Liability Insurance can help protect you from that risk.

Technology Professional Liability Insurance: Related Resources

If you have a question about Professional Liability Insurance that we haven't covered here, there's a good chance it’s answered below. Browse these resources for more information about the Professional Liability Insurance: