Do Consultants in California Need Professional Liability Insurance?

For most small to medium size consultants, deciding whether or not to purchase professional liability insurance (also called errors and omissions) can be a very difficult decision.  With the vast majority of consultants in California set up as independent contractors, consultant’s face a multitude of risks that should be carefully evaluated before a claim occurs, rather than after.  While consultants actually comprise a variety of fields ranging from legal and professional to technology, the commonality between them is each provides professional advice or services for a fee.  The need for professional liability insurance often comes down to the risks inherent with each type of consulting practice as well as the circumstances under which professional liability claims are likely to occur.

When Do Professional Liability Claims Arise For Consultants?

Often times, professional liability claims arise when a consultant provides a highly specialized service that a client does not fully understand, but is heavily reliant upon for various reasons.  When things do not go as planned for the client, often times for reasons outside of the consultant’s control, the blame often falls back on the consultant, regardless of whether or not an error actually occurred.  In instances such as these, adequate professional liability insurance often means the difference between financial solvency and bankruptcy for the consultant.  Also, it should be noted that any claim concerning a possible error or an omission in professional advice will not be covered by general liability insurance, which typically covers bodily injury, advertising injury or property damage.

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How Do I Know If I Need Professional Liability Insurance?

The first step in determining what, if any professional liability insurance may be needed is to determine what assets for the consultant are at risk in the event of a claim.  For most professionals, personal and business assets that may be exposed in a lawsuit greatly outweigh the short term costs of purchasing adequate professional liability insurance.  Aside from personal or business assets at risk from a claim, the other side of the equation means taking an honest evaluation of the risks inherent in the services provided by the consulting practice.  As an example, our agency was recently contacted by the company that provides VOIP phone service for our office regarding professional liability insurance.  When evaluating the risks facing this firm, the first thing that became apparent was the catastrophic impact a server crash that brings down phone service for their clients could have on their business.  A single event that dropped phone service for only an hour or two could be enough for one of their customers to loose a major client who may be unable to reach them at a critical juncture.  This single, seemingly insignificant event may be enough to trigger a major lawsuit that would be uninsured without professional liability insurance.  While each scenario will vary, it’s very important to consider even the mundane portions of a business that could lead to a catastrophic professional liability exposure.

How Much Does Professional Liability Insurance For Consultants Cost?

Most professional liability insurance starts at about $2,000 per year for small to medium size consultants.  The cost of coverage will dependent upon a number of factors relating to the consulting practice, as well as the coverage’s included with a particular policy.  Underlying coverage’s and exclusions can vary greatly from one policy to the next.  According to a 2005 survey by Marsh Inc, the average national cost for professional liability insurance was $3.29 for every $1,000 in business revenue.

Conclusion

Determining whether or not your consulting practice needs professional liability insurance will come down to a number of factors including how much revenue is generated by your consulting practice, your personal and business assets that may be exposed in the event of a lawsuit, as well as the cost of professional liability insurance.  In addition, smaller firms will need to weigh the opportunity cost of foregone contracts from employers that require professional liability insurance as a condition of employment.  If you have any questions or would like to schedule an appointment with a Schaedler Insurance advisor to discuss professional liability insurance for your business, please visit our California Errors & Omissions page and complete the contact form.

Jeremy Schaedler

El Dorado Hills, California

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Related Pages:

California Business Insurance: General Liability vs. Professional Liability

Professional Liability Overview

Related Material: 

The Wall Street Journal- “Small Talk” October 26^th, 2006