Handbook / Business insurance

Professional liability insurance for freelancers and consultants

When you sell your expertise, the biggest risk is often not that someone trips over your laptop bag. It is that a client relies on your work, something goes wrong, and they say your mistake cost them money. Professional liability insurance exists for that risk. This guide explains what it is, how its unusual policy structure works and how to buy it sensibly.

What it covers

The SBA lists professional liability insurance for businesses that provide services to customers, and describes it as protecting against financial loss resulting from malpractice, errors and negligence. Depending on the profession, it is also called errors and omissions insurance, or malpractice insurance.

Typical claims involve allegations such as:

• a mistake in advice, a report or a calculation
• a missed deadline that caused a financial loss
• work that did not meet the agreed standard
• an oversight that a professional should have caught

A policy usually pays for defence costs and for settlements or judgments, up to its limits and subject to its terms and exclusions. Defence costs matter because even a claim without merit can be expensive to answer.

Who should consider it

Consider it seriously if your work involves:

• advice clients act on: consulting, accounting, coaching for business, marketing strategy
• designs or specifications others build or rely on
• software, data or systems a client's business runs on
• reports, inspections or assessments
• managing projects or money for clients

Ask: if I made an honest mistake, how much could it cost my client? If the answer is more than you could pay yourself, insurance deserves a look.

Professional versus general liability

General liability typically focuses on bodily injury and property damage to third parties. Professional liability addresses financial harm from your professional work. They do different jobs, and many service businesses carry both. The guide on general liability insurance covers the other half, and the working-alone guide on business insurance types compares the main policies.

Claims-made or occurrence

This is where professional liability differs from many policies people know.

Occurrence. The Texas Department of Insurance describes an occurrence policy as covering claims arising from events while the policy is in force, regardless of when the claim is first made.

Claims-made. The same source describes a claims-made policy as covering claims reported during the policy term, if the event occurred after the effective date of the first policy, and notes that a policy may specify a retroactive date to cover earlier acts.

Many professional liability policies are claims-made. That has consequences:

• Continuous cover matters. If you let the policy lapse, claims made later about past work may not be covered.
• Retroactive date. This is the earliest date of work the policy covers. When you switch insurers, try to keep the same retroactive date so past work stays covered.
• Tail cover. An extended reporting period lets you report claims after the policy ends. North Carolina's guidelines, for example, require claims-made policies to offer the option to purchase an extended reporting period on cancellation or non-renewal. State rules vary, so ask your agent what applies.

If you close your business or change careers, think about tail cover before the last policy ends.

Reading a quote

Compare quotes on the same basis:

• Limits: per claim and aggregate for the policy period.
• Deductible or retention: what you pay first.
• Defence costs: whether they reduce the limit or sit outside it.
• Retroactive date and claims-made or occurrence basis.
• Exclusions: common ones include intentional wrongdoing and some contractual liabilities. Read them.
• Territory: whether work for clients elsewhere is covered.
• Consent to settle: whether the insurer can settle without your agreement.

Buying it

The SBA's advice on buying business insurance applies here: assess your risks, find a reputable licensed agent, and shop around, since prices and benefits vary. It also notes that agents are paid commissions, so look for one who understands your type of work. Some professional associations arrange group policies for members; compare those too.

Be accurate on the application. Describe your services fully. A policy may not respond to work you did not disclose.

Contracts and insurance together

Insurance and contracts work together. A clear scope of work, defined deliverables, acceptance steps and, where appropriate and enforceable, a limitation of liability reduce the chance of a dispute. The guide on statements of work explains how to define scope.

If a client contract requires insurance, check the required limit, whether the client must be named on a certificate, and whether the contract asks you to accept liability your policy excludes.

When a claim arises

Most policies require you to report claims, and sometimes potential claims, promptly. Do not admit liability or agree to pay before speaking to your insurer. Keep your records of the work and communications.

If clients rely on your expertise, price the cost of a mistake, buy cover that matches it, and keep a claims-made policy continuous.