6 Things You Need to Know Before Buying E&O Insurance for Your Consulting Firm
Consulting firms offer business solutions across an array of industries, from technology to energy. No matter the niche, these businesses are exposed to professional liability suits. To ensure protection from legal action, consulting firms should make professional liability (E&O) coverage a core part of their insurance program. This article will offer answers to common questions about E&O insurance.
Key Things to Consider Before Buying E&O Insurance
Limits of Insurance and Deductibles
When it comes to limits, I typically ask my clients whether they’re purchasing E&O insurance to comply with a contract or not. If they are, the natural place to start is with the limits required in the contract. If not, the client should consider worst-case scenarios involved in the work they do—in other words, what type of adverse financial consequences would your clients suffer if you made a mistake? Remember, this limit not only has to cover financial damages but also the legal defenses associated with the claim. Insurance companies typically start off at $1,000,000 of coverage and move up in million-dollar increments.
Many insurance companies can offer as much as $5,000,000. If more coverage is needed, your broker can introduce a second carrier to provide additional limits. Some insurance carriers offer limits lower than $1,000,000, such as $500,000 or $250,000, though the savings is often disproportional to the reduction in coverage. Deductibles typically start at $2,500 and can often be adjusted to $5,000, $10,000, $15,000, or $25,000. Usually, the deductible applies only once to both the damages and defense costs, but you may want to ask your broker at the outset to make sure the deductible isn’t applied separately.
Claims Made Forms and Retroactive Dates
E&O policies are almost always written on a “Claims Made” policy form. As the name implies, the date the claim is made to the insurance carrier dictates which policy term will respond to the claim. The key concept to grasp is that, for consultants, it can often take time to discover a mistake. For example, if you provided advice to a client on June 1, 2019, the client may not discover an error until December 1, 2019, they may not notify you until February 1, 2020 and you may not notify your insurance company until February 15, 2020. In this case, the policy in place on Feb 15, 2020 will respond, since that’s the policy in place at the time the claim is made.
A “retro” (retroactive) date is only found on a claims made form (not an occurrence form). It is typically located on the declarations page of the policy. The insurance carrier will not cover any claims in which the wrongful act occurred prior to the retro date. So, for a claim to be covered, the wrongful act must occur after the retro date and the claim must be made during the policy period. For maximum coverage, you’ll want your retro date to be the date you started your business. This may increase the premium, but it will ensure that all your past work is covered. If you change insurance companies, it’s crucial that you maintain the retro date on the prior policy. Otherwise, none of your past work will be covered by the new policy.
Defense Costs and Legal Representation
Defense costs are the legal costs associated with defending your company in a lawsuit. The expenses associated with defense costs “erode” the limit available to pay damages. So, if you have a $1,000,000 limit and the defense costs total $200,000, there is only $800,000 available to pay the damages. The insurance company almost always requires that they select the attorney to defend the claim. The rationale here is that once you pay the premium, you transfer the risk to the insurance company, so it’s now their money at risk. As such, they want to use their pre-approved law firms not only because they trust those firms, but also because they have pre-negotiated rates as a result of sending large amounts of work to those firms.
Giving up control of the defense is one of the areas that causes the most stress and distrust between clients and insurance carriers. It’s common for insurance carriers to evaluate the facts of a case and settle the claim even though the insured feels they have done nothing wrong. Remember, the insur ance company’s primary concern is the total cost of the claim. They avoid entering long, drawn-out legal battles pursued to defend your pride and reputation. Some carriers make exceptions and allow clients to assign counsel, but you will need to work with your insurance broker to find a carrier that will agree to this.
In Summary
Professional liability insurance is a must for any consulting firm operating in today’s litigious business environment. This crucial coverage offers legal protection, lowers cash flow volatility, and helps achieve compliance with business contracts. With the information we’ve covered, you’ll be able to make educated decisions when it comes to selecting the proper E&O coverage to suit your organization.