Insuring a consulting firm can pose a challenge. Many professionals start a firm today out of necessity — creating their own employment. You take years of expertise and open a consultancy, often out of your home or in an office suite. This means a tight budget.
Insurance is one of the areas where entrepreneurs may try to cut costs, but, to protect your business, you need to have your insurance agent evaluate all the exposures you face and offer solid coverage solutions.
What does the professional liability policy cover?
The consultant and its employees provide a service or offer advice, but what if it is faulty? Any professional consultant needs professional liability coverage, also called errors and omissions.
The professional liability policy may be worded as follows:
“The company will pay on behalf of the insured any loss excess of the deductible not exceeding the limit of liability to which this coverage applies that the insured becomes legally obligated to pay because of claims made against the insured during the policy period for wrongful acts of an insured or because of personal injury arising out of wrongful acts of an insured.”
In addition, the policy may say, “Coverage for allegations of bodily injury, sickness, disease, or death of any person, or damage to or destruction of any tangible property, including the loss of use….”‘
This wording shows the limited scope of the professional liability policy. The intent is to cover only negligent professional or “wrongful” acts. The policy also provides limited protection for personal injury, such as libel or slander, committed by the insured against a third party.
What does the commercial general liability (CGL) policy cover?
The CGL covers bodily injury to a person or damage to the property of others caused by a firm’s negligence. As courts have ruled repeatedly, the CGL policy is not a performance bond. A CGL policy is not intended to cover the quality of a company’s advice or service. This helps constrain the contractor from low-bidding a job, performing poorly and then relying on the insurance carrier to cover that risk.
Look first at CGL policy language under the insuring agreement, the heart of the policy:
“We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”
Here are a few of the exposures covered under the CGL:
- Premises and operations liability for persons injured or items damaged while on your business premises or because of your business operations.
- Additional insured coverage when you sign certain written contracts or agreements such as leases.
- Tenant’s liability in the event the business operations, for example, accidentally start a fire in rented premises.
- Host liquor liability if you are not in the liquor business.
- Defense for covered claims.
- Bonds and court courts associated with a claim.
- Limited financial remuneration when assisting your carrier in the defense of a claim.
In addition to bodily injury and property damage, the CGL covers personal injury liability, including libel and slander, as well as advertising injury. The CGL offers consultancies broad coverage and peace of mind. You can run your business knowing that help is available in the event of a broad range of losses.
Althought there is a great deal of uniformity between professional liability forms and commercial general liability forms, all carriers use a variety of forms. Coverage can vary widely from one insurance carrier to another, so an agent should be able to help you determine the coverage differences and help you make a strong choice to protect your growing consultancy.
What are some CGL exclusions?
There are many exclusions under the CGL, and to understand each one is tricky. Forms differ and jurisdictions that hear lawsuits vary greatly. However, here are some general exclusions:
- Intentional injury — When a business owner acts in self-defense, there is generally coverage. For example, suppose a robber breaks into the darkened firm and brandishes a knife at the owner, who is catnapping. He heaves a computer monitor at the burglar and injures the burglar. Carriers should defend the case unless it appears the insured intended to inflict malicious injury.
- Care, custody and control of property owned by others — For the consultancy that repairs computers or other equipment, bailee coverage may be necessary.
- Faulty workmanship.
- Liability arising from an aircraft, auto or watercraft — If you use any of those conveyances in your business, you’ll require specific coverage to protect your assets. However, if you provide an automobile to an employee who gets in an accident, you may have coverage, depending on the coverage form and the jurisdiction.
While the CGL policy offers the majority of consultancies broad coverage, your agent must evaluate each risk carefully to ensure the CGL adequately protects the consultancy’s unique exposures.
The CGL may still lack scope
As your consultancy grows, the CGL is only part of your coverage solution. The CGL will not cover every exposure you face, especially once you hire employees.
In most states, after you hire either one or a small number of employees, the state mandates workers’ compensation coverage. In addition, employment practices coverage is important in today’s complicated employment arena. There is no coverage under the CGL for most employment exposures like a wrongful termination or a discrimination claim.
Your consultancy may start with only one computer and a printer, but as your firm grows so does its personal property. Don’t forget to insure your personal property, as well.
For firms with even the most trusted employees, crime policies are vital. For example, suppose you hire a bookkeeper to assist with accounting and administrative tasks. Unbeknownst to you, she likes to gamble. Over time, she begins to embezzle funds, and, before you know it, you are short thousands of dollars. Crime coverage is designed to defend and pay these types losses. The Association of Certified Fraud Examiners found that firms with fewer than 100 employees were frequently hit by fraud, accounting for 32% of the incidents they surveyed.
Clearly, the CGL offers broad coverage and peace of mind for any consulting firm, but there are many other risks your business faces that may require specialized coverages. An independent agent can help you sort out the risks.
One easy approach to coverage
If you own a consultancy, you may be confused about your unique coverage needs. The way many agents approach your coverage is to tell every new business owner he or she needs general liability coverage. Then they review the consultancy’s business operations to determine what additional coverage, such as professional liability, employment practices or workers’ compensation are required.
Because most consultants have auto insurance, to some extent you understand liability coverage. The CGL is more complicated, but the general principles of coverage for bodily injury and property damage are similar to the auto policy. For the new consultant, this comparison may be a good starting point to help you understand your company’s need for general liability coverage.
In today’s complex business environment, no consultancy should go without two types of coverage — professional and general liability — at a minimum. An experienced independent agent can help you ensure your business thrives and prospers in the coming years.