As a freelancer, do you know if you have liability when working with your clients? If you do have a potential liability, would it fall under professional liability insurance?
What is professional liability insurance?
Professional liability insurance covers mistakes in your work or things that you leave out of your work. It is also called errors and omissions coverage.
For example, you are a marketing consultant and your client’s sales drop 50% after they follow your advice. If they sue you, this would likely fall under a professional liability insurance claim.
How is professional liability insurance different from general liability insurance?
Both professional and general liability coverages can protect you if a client sues, but they do slightly different things.
General liability insurance covers general personal injuries or property damage. This could be a client slipping and falling in your office or if you accidentally knock over an expensive piece of equipment at their location. The difference is that instead of being related to your work, general liability covers things that could happen to practically any business.
Note that a common mistake is thinking that any bodily injury claim falls under general liability insurance. For example, if an architect’s error in their design led to someone getting hurt, that would be a professional liability claim
Won’t your LLC protect you if a client sues you?
Having an LLC may not fully protect you from liability as a freelancer.
The first reason why is that an LLC only protects your personal assets. If you get sued, you could still lose everything that’s under your LLC. Business insurance, not a corporate structure, is what protects businesses.
The second reason is that when you’re a freelancer performing services yourself, it can be really easy for a plaintiff to argue that you’re still personally liable for your personal actions.
Can a client require you to have professional liability insurance coverage?
Clients requiring their contractors to have insurance is common in many fields. It guarantees that the client can get reimbursed for claims without having to worry about whether you have enough money if they needed to sue you. It also protects you as you can direct the claim to your insurance company instead of worrying about how you’ll pay for it.
Will your client’s insurance protect you?
Since a freelancer acts as an outside business, you generally don’t fall under your client’s insurance policy. This is different from how employees are insured by their employers.
Even if the client’s insurance policy initially paid the client on a claim, their insurance company would still likely seek reimbursement from you.
It is theoretically possible for a client to buy coverage that would protect you as well. However, this is uncommon and you should carefully consider the limits and exclusions on that policy when deciding whether it gives you adequate protection.
What is your maximum liability?
If you work on relatively small projects, you may think that you don’t need insurance because you can afford to just refund the invoice. Your liability is not necessarily equal to what you billed your client.
For example, your client hires you to write a comparison between them and a competitor. The competitor files a $1 million lawsuit alleging that what you wrote is slander. You could potentially be liable for legal defense costs plus the possible judgment against you or your client.
So do you need professional liability insurance?
If you need specific advice on what business insurance you need for your situation, talk to a licensed insurance agent in your area. Hiscox is a popular insurance provider that offers professional liability policies to business professionals.
You may also want to meet with a lawyer to discuss the potential liabilities involved in your business.