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Why Do Some Freelancers & Independent Contractors Need Professional Liability Insurance?

Young female freelance developer going over a presentation on her laptop while taking notes and doing research on her smartphone.

As an independent contractor (IC), you enjoy a high degree of professional freedom. Unfortunately, that very autonomy can leave you vulnerable to many things, including the potential for claims made by unhappy clients.

In the event you’re targeted with legal action, it’s critical that you have financial protection. Without it, your reputation and even your personal assets could be at risk. Professional liability insurance may be your best option for safeguarding your personal assets and achieving the peace of mind you need when working for yourself.

In this article, we’ll explain what professional liability insurance is, why it's so important for many ICs, and which factors you should consider when you’re choosing an insurance company.

What Is Professional Liability Insurance?

Often referred to as errors & omissions (or E&O) insurance, professional liability insurance provides policyholders coverage for the costs of lawsuits arising out of their professional services. It aims to help protect professionals in a variety of sectors from the costs arising from defending a claim, as well as paying damages or settlements to resolve disputes.

E&O coverage should not be confused with general liability. While both can be of value to ICs, general liability addresses lawsuits arising out of bodily harm and damage to physical property that might occur at your work premises or elsewhere. (Think “slip and fall.”) Meanwhile, E&O is designed to cover lawsuits brought by clients claiming that your faulty or substandard work has caused them to suffer financial losses. Crypto journalist Laura Shin refers to this as "medical malpractice for the freelance set."

Why Do Independent Contractors Get Sued?

A variety of circumstances can prompt professional liability lawsuits targeting ICs or consultants. In general, claims arise most often when clients are unhappy with your work or feel they’ve been misled.

ICs, depending on the nature of their services and their level of expertise, are expected to perform their work with a certain standard of care. Failure to meet that standard is called “negligence,” and is often the basis of E&O claims against ICs. If that failure to meet expectations results in financial loss for their client, a claim or lawsuit could follow.

For example, a freelance web designer would be expected to follow best practices in building a website, such as following applicable accessibility requirements. Failure to address this might result in the client having to take down the site, losing valuable business, and the client might sue the designer for its losses.

Mere accusations of negligence can still lead to lawsuits, even when contractors have performed their work up to industry standards. Clients are often quick to blame ICs for disappointments, even when these stem from issues outside the contractor’s control.

Now, not all freelancers or ICs carry the same level of risk of a lawsuit. How can you tell if you’re in one of the riskier businesses? Perhaps the more money on the line for the company, the riskier the work. Some lines of business that are most likely to seek E&O insurance are: tech freelancers, real estate brokers, real estate inspectors, business consultants, etc. But let’s face it, dog walkers, wedding planners, and photographers are exposed to risk too, and if a client isn’t happy or something goes wrong, having insurance can mean the difference between being able to continue your business or not.

How Does Professional Liability Insurance Protect Independent Contractors?

Professional liability insurance provides a range of benefits to freelancers, consultants, and ICs. The right policy can prove to be a financial cushion and a huge source of personal comfort and confidence. Here are a few of the most compelling advantages of professional liability insurance.

Easier to Land Top Clients Who Mandate Insurance Coverage

Depending on your field, professional liability coverage may be legally required in order to do your work. This is common in sectors like healthcare, law, and accounting. In other industries, clients may state a preference for E&O coverage due to potential complications involving distribution companies or third-party platforms. Obtaining insurance coverage in advance could make it easier to land top clients.

The need for E&O coverage is particularly common when working with major organizations. Real estate technology expert and Anecka owner Pat Pohler explains that many "large businesses or public institutions require you to carry liability insurance before you work for them." He adds that some clients go so far as to request proof of insurance.

Protection for Personal Assets

As a freelancer or IC, your personal savings or assets (like your home or your car) could be vulnerable in the event of a lawsuit. Without coverage, you could bear the brunt of the financial burden as you hire an attorney, manage a time-consuming investigation, and deal with negotiations. This doesn't even begin to cover the economic devastation of paying settlements or handling other claim expenses out of pocket.

Even if you emerge victorious, attorney fees alone make E&O a valuable option. Quality defense often costs more than five figures per claim. When it comes to your reputation and livelihood, you can't afford to skimp on legal representation. Therein lies the value of professional liability coverage, which allows you to seek help from a seasoned attorney without worrying how you'll handle legal fees.

Peace of Mind

The IC lifestyle can be freeing, but, as we've mentioned, it comes with an elevated level of risk that often prompts considerable stress among otherwise enthusiastic professionals. With the right professional liability insurance policy, however, greater peace of mind is possible.

For many contractors, the greatest fear lies not in the prospect of losing a lawsuit, but rather in the potential for being sued at all. Should you be subjected to legal action, the cost of defense could be prohibitive. Professional liability insurance should lend much-needed comfort. While risks remain significant, you can at least know that financial resources will be available should the worst-case scenario arise.

Policies Can Be Surprisingly Affordable

To the IC with limited resources, any added expense may seem unnecessary. In reality, however, professional liability plans tend to be cost-effective — especially given the significant safety net that such coverage provides. A small investment in liability insurance can produce significant savings if the worst-case scenario becomes a reality.

Exact costs for E&O coverage will depend on a variety of factors, such as location, revenue generated, and professional specialty. Previous legal action can also have an impact — but if you've already been through the hassle and expense of a claim, you should be even more aware of the need for comprehensive coverage.

What to Look for in an E&O Insurance Company

Cost is just one of several factors worth examining when selecting a professional liability insurance company. It's important to look at the big picture to ensure your investment will provide the level of protection you deserve. Other key considerations include:

  • Round-the-Clock Access: Time is of the essence when dealing with clients who threaten legal action. The professional liability insurance carrier you choose should make it easy for you to get in touch with licensed insurance experts who can answer your questions and get you started with the claims process. Likewise, you should also be able to have consistent access to a digital portal, where you can find up-to-date information on your policy.
  • Customer Service: Responsive customer service representatives are essential, particularly if you struggle to navigate the ins and outs of professional liability coverage. Reps should listen patiently to your concerns and respond in a respectful manner. You can get a sense for the quality of a particular insurance company’s customer service by interacting with reps prior to investing in an E&O plan.
  • Claims-Handling Experience: In the event someone makes a claim against you, you'll want to feel confident your E&O carrier has your back. Prior to purchasing a policy, make a point to contact the carrier’s customer service team and ask them detailed questions to determine how claims work, find out who is responsible for guiding you through this process, and what will happen if you are sued by a current or former client.
  • Reputable Insurance Company: As you weigh your options, it may not be immediately obvious which insurance company underwrites the E&O insurance product you’re looking at. Do your research to determine the role of the underlying insurance carrier early on. Is this company trusted? Have complaints been submitted about them to the Better Business Bureau (BBB)? Regardless of how the specific E&O policy in question functions, it's crucial that the carrier is reputable. E&O carriers and policies that initially seem compelling may no longer feel worthwhile if you discover that the underlying carrier has a problematic history.
  • Financial Strength: Once you've determined which insurance company is underwriting your E&O policy, take some time to research the financial strength of this institution. AM Best provides trusted rankings accompanied by detailed information, as does Standard & Poor’s. Both rating agencies can provide excellent insight into insurance companies' financial health — and how this relates to their ability to pay potential claims. While specific rating factors vary from one agency’s ratings to the next, such insight can help you determine which insurance companies can be counted on to help you handle significant financial risks.

Other qualities, while not always as essential as the categories outlined above, may influence your decision. For example, many ICs prefer to buy E&O coverage directly from insurance companies, rather than working through brokers or other affiliated distributors. Buying direct also may limit complications when navigating the claims process because there’s never any question as to who handles your claim.

Final Takeaways

There's a lot to love about independent contracting and consulting, but the threat of claims can make even the most optimistic professionals nervous. But if you’re backed by a solid professional liability insurance company, you can take comfort in knowing that you're equipped to handle a worst-case scenario if one should ever come up.


Image courtesy of iStock.com/Drazen_


The views expressed in this article are those of the author and do not necessarily reflect those of Berxi™ or Berkshire Hathaway Specialty Insurance Company. This article (subject to change without notice) is for informational purposes only, and does not constitute professional advice.

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