What to Know About Purchasing Contractor’s Insurance, including Errors and Omissions Insurance

​Summary
Find out all the details you need to know when purchasing contractor's insurance, including errors and omissions, business and liability.

When you made the decision to open your own business as an independent consultant, you took on the responsibility of ensuring your consultancy's legal and financial well-being. As an independent consultant, you are your business. If any legal or financial problems arise that affect your business, they also affect you directly. By protecting your business against the risk of liability losses, you are protecting yourself and your future security.

What Are Your Options?

Of course, the types of contractors insurance that are right for your business will vary greatly, depending on your industry, the size of your business, your client type, and other factors. Below are a few common types of business insurance that are often applicable to independent consultants.

General Liability
General liability insurance is often necessary for independent consultants. This insurance covers a wide range of incidents, including accidental damage to a client's property, claims of libel or slander, and the cost of defending lawsuits.

Professional Liability
Also known as "errors and omissions insurance," professional liability insurance provides protection in the instance of a client incurring financial harm due to an error or omission - that is, a failure to perform an integral part of your responsibility on a project - on the part of the consultant.

Homeowners' Insurance
You may wonder what homeowner's insurance has to do with protecting your business. While this doesn't apply to everyone, it's relevant for those independent consultants who choose to work out of home offices. Most homeowners' insurance policies do not cover losses sustained by a home-based business by default, and require specific riders added to the policy. This is especially true if clients visit your home office setting.

Why Do You Need It?

Some independent consultants forgo insurance in order to cut costs. However, the cost of resolving even a moderate issue, such as a contract dispute, without insurance can be far more expensive than the cost of the premiums. It can sometimes be enough to put companies out of business entirely. Protecting yourself with business insurance is not just the smart thing to do; some states may require you to have certain types of business insurance.

Even if You Don't … They Do

The reality is that many of your future clients will also require specific insurance coverage as a condition of hiring. By hiring you as an independent consultant and putting their project into your hands, they are placing a large amount of trust in you. Mistakes happen though, so it is important to guard against them and mitigate the client's risk as much as possible. Many procurement organizations require standardized insurances to enable set-up of a new vendor business providing services, even for very small scale projects.

How Much Do You Need?

Exactly how much insurance you need will again depend on your industry, the type of clients you have, and other factors. However, expect most clients to require a minimum of $1,000,000 in general liability insurance, and another $1,000,000 in professional liability coverage, so keep these numbers in mind as a starting point. Umbrella policies, which cover costs above and beyond your general liability coverage, are also generally recommended.

How Much Does it Cost?

You guessed it -the cost of business insurance will vary, depending on your business' income and industry, among other factors. Consider looking into BOP insurance, also known as a "business owners policy."  These policies combine the coverage of a number of different policies - such as general liability and professional liability - into one package, often at a cost that is significantly less than purchasing the policies separately. Get as many quotes as you can to make sure that you get the best value possible. If you take the time to shop around when purchasing insurance, the cost may be less than you expect.
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You may also consider offering services via an independent contractor engagement specialist; MBO Partners, author of this blog, is one such organization. These organizations offer insurances aspart of their service package for independent business owners, forgoing the need for purchasing expensive individual business insurances before revenues can sustain it.

How Do You Buy It?

Business insurance can be purchased through an insurance agent or directly from the insurer. Take the time to research your options before purchasing; you may want to consider getting recommendations from colleagues or from your local chamber of commerce.