If you’re in the business of management consulting, you know that plenty can go wrong over the course of an engagement. Whether you actually make an error in judgment or things go awry due to events beyond your control, you’re at risk of a lawsuit if your client isn’t happy.
Errors and omissions (E&O) coverage is one way you can protect your business against the high cost of litigation, but many management consultants may not understand the difference between this type of coverage and other kinds of consultant business insurance. So, Business Insurance Now has compiled this handy reference based on some of the most common questions we receive from management consultants.
I’ve heard about professional liability insurance and errors and omissions insurance. Are they the same thing?
Yes, “errors and omissions insurance,” “E&O insurance” and “professional liability insurance” are effectively the same insurance going by different names. If one of your clients should allege that they suffered a financial loss due to an error you or one of your employees makes on the job, this type of insurance pays for your legal defense and any legitimate financial compensation for your client, along with specific other expenses as defined by the policy.
Is “general liability insurance” another name for professional liability coverage too?
No. Errors and omissions coverage covers you for errors you may make while doing your job, while general liability insurance responds to claims of bodily injury or property damage, either at your business location or your client’s.
For example, general liability insurance comes into play if a client suffers a fall while visiting your office, or if you or one of your employees accidentally injures someone or damages property at the client's office.
Having general liability insurance can be important for business development, as many companies require both professional liability and general liability coverage in their management consulting contracts. They want to reduce their own risk by ensuring that any service provider visiting their premises is covered – that goes for business consultants as well as pest-control professionals, maintenance providers, window washers or plumbers.
Many business consultants choose to purchase general liability coverage as part of a Business Owner’s Policy, also known as a BOP. These specially priced package policies include both general liability insurance and property insurance, which is designed to protect your business property against physical loss or damage by theft or fire, for example. Your property is covered whether it’s at your own place of business or your client’s.
Because a BOP offers two types of coverage for a single combined price, buying a BOP is a cost-effective way to get the general liability coverage clients demand, plus the added benefit of property coverage, without spending much more in premiums.
But doesn’t general liability insurance already include errors and omissions coverage?
No. If a client sues you because they think you made a mistake in the course of doing your job, general liability doesn’t cover you. For that, your firm needs professional liability coverage. General liability typically excludes litigation that involves allegations of professional negligence or failure to perform professional duties, but does cover most bodily injury or property damage claims.
What does errors and omissions insurance cover?
E&O insurance is triggered when your client claims that you were negligent or made an error on the job that caused the client to suffer a financial loss. For a management consultant, this might involve:
- Improper documentation
- Improper fact verification
- Missed deadlines
- Misrepresentation of facts
- Breach of nondisclosure
- Loss of data, improper procedures or negligent handling of data
- Failure to prevent electronic theft of records and confidential information
- Employee theft and sale of client’s trade secrets
- Deliberate dissemination of false information
- Violations of state and federal law, such as violation of right to privacy
Just as important as knowing what’s covered is knowing what’s not. Professional liability coverage will pay for your legal defense and legitimate financial compensation for your client, but it won’t pay for the time and money you spend to make the problem right. And, errors and omissions insurance won’t protect you if you should get sued for something like stealing a client’s customer away. For these types of situations, you may wish to create a contract that outlines procedures for conflict resolution and clearly states your and your client’s rights.
I’ve never made a mistake that resulted in a lawsuit. Do I really need errors and omissions coverage?
It’s true that competent management consultants have a low risk of getting sued – and that’s good news. But, most business owners still decide to protect themselves with insurance. Why? Because although the odds of a lawsuit are low, the costs of a lawsuit are high.
The chance of getting sued often has less to do with the quality of your work than with your clients’ temperament and expectations. If your client relationship goes sour for any reason, you could be accused of negligence even if you didn’t make any mistakes. Remember – there are many factors beyond your control that can affect the outcome of your consulting engagement, and if your name is on the contract, you’re the one that will be held accountable.
If you feel a lawsuit has no merit, you’ll still have to pay for a legal defense to prove it. Because many management consultants are solo practitioners, there’s typically no legal team standing by or large bank account to fall back on. In such cases, professional liability insurance can help you stay in business while you fight your case in court.
What can I expect to spend on professional liability insurance?
The cost of errors and omissions insurance depends on the limits of liability and deductible you choose for your consulting firm. Your company’s location and revenues also factor into your premium calculation. Generally speaking, most one- or two-person consulting firms can get $1 million in E&O insurance for about $1,000 per year, or less than 1 percent of gross revenue for many business consultants.
If you still have questions about E&O insurance or other types of business insurance, contact a small business insurance broker and ask. There’s no cost to get a quote, and a qualified agent or broker can help you decide whether this type of insurance is a must for your business.
Writtten by Brenna Lemieux - check her out at Google+ or Twitter