Standard business insurance policies do not meet the needs of consultants, who provide guidance to various types of businesses. In the early years of a consulting practice, securing a professional liability insurance policy will be challenging.
All coverage against income loss is based on the proven track record as reported to the IRS. Inconsistent income across a number of years provides the insurance companies the ability to deny coverage. Steady income for at least three years, and preferably five, will make insurers more willing to underwrite errors and omissions policies for a consultant company.
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A business owner’s policy, or BOP, is a standard policy with property, automobile and liability components which are intended to cover brick and mortar businesses. The BOP can be used for the building and cars, but consultants require sufficient errors and omissions insurance. Some BOP underwriters will have an option for E and O, but an additional policy is required in most instances.
Clients can claim that the information provided to them by the consultant caused them extensive losses. When this happens sufficient insurance must exist to protect against extreme loss due to litigation. Assuming that a lawsuit will not be filed can be a devastating decision. While the client will be required to prove that the counsel provided was the cause of business problems, the consultant will be required to prove that their advice was complete and accurate. This process can be very costly.
Errors and Omissions Coverage
Independent consultants should seek sufficient professional liability insurance coverage to protect against lawsuits. When a client blames the consultant for a business result, the errors and omission insurance will cover the cost of litigation, including legal fees. Coverage for this type of insurance is based on the perceived risk evaluated by each insurance company that offers the coverage.
- Policy documentation – All written descriptions provided with the policy must be read very carefully to determine exactly what coverage is included. Whenever certain terms are included, such as “wrongful act,” the cost of the coverage will be affected.
- Defense costs – All E&O policies should include coverage for all attorney fees that will be incurred when defending allegations of inaccurate counsel. Legal costs can decimate any business. Limits on the policy must be set high enough to cover the claim and the legal fees.
- Wrongful act – Whenever professional advice is perceived to cause substantial financial loss for the client, litigation is the logical response. The client must prove that the information provided was incorrect or incomplete.
- Claims made coverage – Since many E&O lawsuits are filed years later, the policy must be kept in force to ensure that the coverage is available when needed. If the policy lapses, the consultant will have to pay for any delayed lawsuits.
- Deductibles – Professional liability insurance policies offer the option to carry a fairly high deductible, or retention, to reduce the annual premiums. Most consultants choose to carry a deductible of $5,000 to $10,000 if they are able to set aside that sum.
Automobile Insurance Coverage
Independent consultants can rely on their personal car insurance policy for coverage. Consulting companies should carry a business auto insurance policy for all company-owned vehicles. Worker’s compensation policies would cover injuries sustained by employees when driving any vehicle for business purposes. Liability coverage on any auto insurance policy should be at least $300,000 per occurrence.
Many professionals may suffer a period of disability and be unable to work. This likelihood is higher than the risk of death for most consultants. One of the methods used to avoid loss of income is to secure a disability insurance policy. All insurance companies offer a different mix of benefits in their disability products.
- Coverage amount – Disability policies will cover 60 percent of the consultant’s annual income based on the previous three years of actual income reported to the IRS. For those based out of a home office, the percentage paid can be less.
- Limited selection – Consulting companies will be able to secure insurance more easily than a freelancer or independent consultant. Inconsistent income will make an insurer avoid underwriting a disability policy.
- Own occupation – Insurance companies charge lower premiums for people who are willing to be retrained and work at some job to earn money. Policies that insure against loss of ability to do a specific job will be very expensive.
- Waiting period – A policy that indicates a waiting period before benefits begin will be less expensive. Some common terms might be 30, 60, 90, 120 or a full year.
- Coverage period length – One, two or five years of payments can be selected for disability policies. Longer payout periods will require higher premiums.
- Annual premiums – Level annual insurance premiums for disability policies will make this coverage more affordable. Certain insurance companies offer this payment plan. People with certain medical conditions or carry extra body weight will be charged higher premiums.
Life Insurance Coverage
Most consultants carry private life insurance policies to care for their families. Owners of consulting companies should carry a life insurance policy where the business pays the premium and names the company as the beneficiary. Most companies do not survive the loss of a principal because transition plans are not written. All proceeds from the life insurance policy should be used to fund the transition plan and keep the consulting company running.
All aspects of the errors and omissions insurance policy must be scrutinized to ensure that proper dollar limits are on the policy. Actual risks are difficult to define in the consulting professions. Fine print in the policy documentation must be read thoroughly to determine the exclusions. Experienced insurance agents are able to define the necessary coverage and then bundle the policies to lower the annual premiums. All deductibles must be set at sufficient levels to save premium costs, but not too high to cause financial hardship if a problem arises.
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