Consultants are on the front lines when it comes to being sued by unhappy clients. This is often because of the nature of the work they do, which is primarily giving advice, or making suggestions, which clients often follow because they understand that a consultant is supposed to have their best interests in mind.
Having errors and omissions (E&O) coverage helps protect consultants or advisors from lawsuits brought on by clients alleging that they were given bad advice or were the victim of poor decision making. Repeated instances of litigation of this type can greatly affect e&o insurance cost for consultants and advisors. In addition to purchasing E&O coverage, consultants should have an understanding of what the policy does, and doesn’t, provide.
Understanding the policy language
While there is no standard professional liability policy for consultants, each insurer will offer its own specific coverage. In order to determine if the coverage offered will be acceptable a detailed analysis of the insurance contract is required. Realize that the exact definition of “wrongful act” can affect your coverage.
Find out what is specifically excluded from coverage and if the insured has the right to refuse a settlement offer in a claim. It would also be prudent on your part to determine if the policy pays on behalf of the insured or does it indemnify the policyholder.
Professional liability insurance protects consultants from allegations of a “wrongful act,” which is defined by most policies as “an act, error, omission, misstatement, misleading statement or neglect or breach of duty”. Professional liability insurance is designed to protect a consultant from allegations that the job was either not done right, or that the job was not done well enough to satisfy the client’s needs.
Defense costs can be a major burden on a firm
Professional liability insurance pays for the cost to defend a suit in addition to paying any award that is made against a consultant in a lawsuit. Typically, errors and omissions policies pay defense costs from within the policy limits. For example, if you have a $1,000,000 policy, the cost for an attorney is included in the maximum payment amount of $1,000,000.
This policy is usually on a “claims made basis” and this means that the policy pays for lawsuits brought only during the policy period. Legal actions can be brought years after the actual event occurs, so allowing coverage to expire can obviously jeopardize protection, which will further lead to having a higher e&o insurance cost in the future.