Freelancer Guide to Professional Liability Insurance

Note: I’m not a lawyer, nothing in this post is meant to be legal advice and is not to be taken as such. Please seek the advice of a legal professional for specific advice about your situation.

Getting sued is probably one of the top concerns freelancers have. After all, even with a contract/service agreement (which you absolutely should have for every project) a sufficiently motivated former client can still take you to court if they have enough time and money. Professional liability insurance is there to cover you if that happens. Find out more about this essential tool for your business.

"Sky of Flowers" - Patrícia Almeida

“Sky of Flowers” – Patrícia Almeida

Fighting a case in court can be expensive, even if you win and your court costs are covered, it may take years to work out a solution and in the meantime you’re spending the cash you could have been using to grow your business into defending yourself in a court of law.

There are two things that can help you. One, form a Limited Liability Corporation; two, purchase a professional liability insurance policy.

Forming an LLC in most states is fairly simple and relatively cheap. In Ohio the cost to file for an LLC is $129, the document to file is pretty standard and if you’re a single member LLC (no partners) a lawyer can quickly work up the paperwork for you fairly cheaply (1-2 hours of billable time). What the LLC gives you is a legal entity with it’s own assets. While it doesn’t fully protect your personal assets against torts or breach of contract claims, but it can limit your liability. Make sure you have a contract and that it’s in your business name, not solely your own.

An LLC isn’t a silver bullet, while it will limit your liability, it’s still a good idea to buy professional liability insurance (PLI) or errors & omissions (E&O) insurance. Basically personal liability insurance will help cover your court costs or any settlement fees. While unlikely, you can be sued for anything, whether you did anything wrong or not and liability insurance can help keep you from bearing the full cost of defending against a negligent claim and any damages awarded in the suit.

HISCOX has a great professional liability insurance plan that will probably run you $500-$1000 a year. If that sounds expensive to you then you really need to think hard about the costs of defending a lawsuit. Remember, contract or not, all it takes is a really motivated client to decide they need to sue you. How much is piece of mind worth?

You can also get general liability insurance which for software developers and designers can help protect your office equipment. Some policies also will help fund your income if you’re unable to work for a period of time. I’d say insuring your business equipment, especially laptops, expensive office chairs, photography equipment or other gear are a big part of your business is a good idea.

It’s up to you to decide how much you want to cover, but I’d say Errors & Omissions is a must for consultants and designers. This will cover you from claims against clients who feel they didn’t get their money’s worth, say their page views didn’t go up or the new site you built them isn’t brining in the sales and they’re blaming you for the “loss.”

So you might be asking yourself “Isn’t this what my contract is for? Isn’t the contract enough protection?” Well the contract is merely an agreement between you and the client and you absolutely should have one. But remember, you can be sued for anything. The contract will help you if things get legal, but you’ll need money to pay for legal fees to defend yourself and that’s where liability insurance will help.

“Well I didn’t do anything wrong and my clients are happy with my work, so won’t I be okay?”

Again, you can be sued for any reason. All it takes is a client that’s sufficiently motivated to sue you for damages. Think of it like car insurance, it doesn’t matter how good of a driver you are, you can get into an accident anytime you’re behind the wheel.

“Won’t this scare off potential clients?”

Some clients such as large businesses or public institutions require you to carry liability insurance before you work for them. You’ll have to issue proof of insurance before you are allowed to start work. Unless a client specifically asks if you have liability insurance though, I would just not tell them.

“What’s the likelihood I’ll get sued?”

Honestly, probably very small, but it does happen. The fees you have to pay for a lawyer and the time and anxiety you’ll face in dealing with the suit could really harm your business. Carrying insurance can help smooth over a lot of that anxiety.

If you work as a freelancer you owe it to yourself to have a few things settled before you take clients. They are: a standard service agreement, an accountant, a formed LLC, and some kind of E&O insurance. Once you have E&O insurance combined with a solid service agreement, it can give you the confidence to carry on with your business without worrying to much about a bad legal situation.