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Discussion: E&O insurance
Can you steer me to some quality info about E & O insurance and other aspects of setting up a hole-in-the wall consulting business?
So asks John in a posted comment.
John:
In my experience, reasonable professional Errors and Omissions (E&O)coverage is now fairly easy to find if you are in a well recognized industry. Otherwise the sweet spot is a group rate negotiated by a professional trade organization, such as NSCSS' group E&O. The risk with E&O is that you fall prey to what I term "false-front" E&O: insurance that is really just General Liability (GL) with a rider to cover an element of E&O. A recent example that crossed my desk: A supposed E&O policy that was really just GL with a rider covering “money damages” for failure to render a professional service.
The cost on this is low, but may not actually provide any practical coverage: as a GL rider, there may have to be actual Bodily Injury or Property Damage to trigger coverage of any kind including the Professional Liability.
The E&O rider solutions I have seen add $3-500 to a GL policy,* whereas real E&O starts not that much higher at $1K for a group rate. If you simply can't afford full E&O, the option is to save your $$ and be prepared to ask your client that an exception be made in your case. If you are in an uncovered niche service sector (like soil science consulting was at one time) your value to the client normally exceeds the client's pro forma need for coverage. Before NSCSS negotiated group E&O that's what I did. It was a pain to deal with that way, but I never lost any work because of it.
The hallmark of a good E&O policy is that includes a duty to defend, which means the insurer will pay the legal cost of defending you. If its not explicitly stated, you don't have it [note added for clarification: without duty to defend, the only party they can reasonably be expected to defend is themselves, against having to pay out a claim]. Coverage should extend to all directors, officers, partners and spouses and for the subcontractors you use. These are all folks likely to be named in an E&O claim.
Good E&O also covers defense cost for allegations of intentional, dishonest or fraudulent acts. Alleged - not actual - is an important and necessary distinction. Again, if coverage in this area is not stated, you don't have it.
Exceptionally good E&O provides full prior acts coverage.
I go for high deductible, and, this may be a bit counterintuitive, but I think it improves my protection. The risk awareness inherent with a high deductible encourages me to have a strong and clear contractual relationship with each and every client.
The contract is how you manage exposure to professional liability claims. A "real" E&O insurer will want to see your contract, will be looking for specific contracted elements, and will want assurance that you use it or similar on a regular basis.
If a client insists on using their contract, I have them attach my contract as a statement of my standard practice and my adherence to professional standards:
- Represent to the contract owner that I am authorized to do business in that state.
- Services provided are based on access to property and information provided by the Owner.
- Owner to disclose all newly discovered information.
- No work outside the scope of work or agreed costs without authorization.
- Contractor solely responsible for methods used.
- Contractor warrants good workmanship. Beyond that, services performed are without warranty.
- Liability of Contractor limited in amount to fees paid.
- Agree to arbitration.
I also have a language on what professional standards I adhere to, holding eachother harmless, me withdrawing scheduling priority if client falls behind on payment, me paying my bills on time to avoid liens being placed on my client's property, and how we get out of the contract.
What you need to have in your contract will vary by state and service sector. I hope it goes without saying: use a lawyer.
*reworded this 2/19/2009 per comment below
Timely and helpful
This is good information. Can you suggest other references that explain E&O insurance? Can we assume the NSCSS group-rate provider resides in the Good to Exceptional categories of your message? Thanks for sharing your experience on this topic.
Group coverage through Leonard Insurance rates as Exceptional
To be clear, all the "good" and the "exceptional" features I mentioned are features of NSCSS' group coverage.
I have been looking for other references, however objective comprehensive information just doesn't seem to be within reach of my search engine. A fair amount of what I find is misleading, steering you to accept products with minimal protection. E&O riders on GL are being promoted on the web more so than straight E&0, and it gives a weak product an appearance of being the accepted industry standard. E&O is, and should be, more expensive than GL. It is a huge red flag when that cost relationship is upside down. The more I look into this the prouder I am of NSCSS for figuring this out at the beginning. I also realize now that my wording in the original piece was way too harsh. I totally regret it and apologize for that. I am taking out the line: "I suspect this type of policy is not intended to provide actual E&O coverage, but is primarily used in an unethical way by marginal contractors to meet client requirements" because by saying that I tarred every good person (and that surely includes several NSCSS members in these tough times) who buys this coverage in the sincere belief that it is a reasonable and cost effective replacement for the genuine article. They surely don't see themselves as the victims I see them as, and that is a simple difference in point of view. It is quite understandable considering the confusing and inadequate guidance available. It didn't warrant me using the nuclear option. I was wrong.
Unlike a clean explanation of what constitutes good E&O coverage, what can be easily obtained online is A.M. Best Company's evaluation of financial stability. The financial stability of our group carrier, Traveler's Casualty, remains rated A+ (Superior). The carrier for the GL-w/-E&O rider example that I mentioned above is rated A (Excellent), so financial stability looks to be in almost as good a condition. As our international financial distress works it way through the system, I expect A.M. Best will be downgrading financial stability ratings as it sees fit. This is worth keeping track of.
Another point of view
Phil Small asked me to post my own feedback about error and omissions insurance. I have had coverage of both general liability and professional (E & O) liability insurance through Travelers/Leonard Insurance for the past five years. I found Leonard Insurance Services and Doug Malcolm decent and reasonable to work with over this period.
Besides from being a soil scientist, I am also a professional wetland scientist, and I do a lot of wetlands and permitting work. An insurance program is open to certified professional wetland scientists (PWS) of the Society of Wetland Scientists PWS certification program. I have known that this policy was less expensive than the Travelers/Leonard policy, but did not pursue it because my policy with Travelers covers me for both soil science and wetlands work.
As my renewal period approached this year (January 2009), I began to look into the alternative insurance policy. The PWS insurance policy is offered through Mid-Continent Insurance Company, with Vaughan Insurance Group as the contact agent. And it does offer broad coverage of services (see below). Bottom line: Their policy saved me $1,000.
I did communicate back and forth with Leonard and Vaughan, comparing coverages, their strengths and possible weaknesses. Ultimately, I was satisfied by Vaughan's description of services.
While I think both policies offer good protection, the description of covered services in my old Travelers E&O policy always seemed incredibly brief and vague. Honestly, I thought that the generic description was simply the way insurance carries go about their business. However, after conversing with Vaughan, I'm not so confident that Travelers really understands the diversity of work that soil scientists partake in. The covered professional services descriptions say a lot:
As a side by side comparison:
My old Travelers plan covered: "Soil consulting or analysis services for soil properties, subsurface conditions or foundations; presumptive bearing values; wetlands assessment for others for a fee."
The Mid-Continent-Vaughan plan covers: "Regulatory Compliance Consulting: Wetland Delineation and Restoration, Permitting, Monitoring, Remediation, Site Assessments and Investigation, Storm Water Management and Planning, Work Plan Preparation, Environmental Program Management, Environmental Compliance Services, Waste Management Consulting, Hazardous Materials Management Consulting, Wildlife Management, Impaired Water Evaluation, Erosion Control Guidance, Water Quality Monitoring, Review of Proposed Environmental Regulations, Water Resource Management, Environmental Risk Management, Environmental Management, Landscape Design, Historical Land Management, Risk Analyses of Environmental Impact, Water Well Design, and Septic System Design."
I am not doing any agricultural consulting. The services covered under the Vaughan plan offers enough variation to adequately cover what I do and offer to clients.
I did switch over to the Mid-Contient-Vaughan policy for this year. Frankly, my business has dropped off notably and the option of saving $1,000 means a lot to me. When I first looked into this policy, I thought I might be saving $1,500, but that was not necessary the case (see below).
There are a few things to consider: (1) my old Travelers policy also included insurance protection for my office (which is not in my home), so I had to get a separate policy to cover my office for fire, theft, etc.; (2) I'm having to carry a separate auto policy to increase my liability to $1M; but (3) I have no deductible when it comes to any grievance filed against me or my business (my old Travelers policy had a $5,000 deductible).
While I carry insurance to protect me from being sued, an equally important consideration is that I occasionally get contracts where $1 million dollar insurance coverage is mandatory for general liability, E&O and auto. I would not want to lose out on the opportunities to go after those contracts.
I think Leonard Insurance continues to offer a very good product, and there is always a chance I might go back if my new policy isn't satisfying in the long run. I just need to save money where ever I can. I feel that the coverage I have with this other policy will suit my needs, offer me good protection, and not strap me financially.
If you are a soil scientist and a PWS, you may want to call and compare policies yourself to see if Travelers remains your best carrier. Mid-Continent is rated "A", not an A+ like Travelers. Ultimately, the homework of researching the best insurance carrier is yours and frankly, at this moment, I don't see a wrong decision either way.
Insurance can be expensive
Insurance can be an expensive choice for freelancers. In a perfect world, we could all afford it and could eliminate any worry about the potential for problems. The fact of the matter is, though, that not all freelancers are in a position to pay $500 just in case of a problem. Freelancers working with smaller clients, on projects with limited risks, don’t need errors and omissions insurance as much as their counterparts working with big clients. If you feel comfortable with the risks associated with your projects, operating without insurance may not be an issue. However, it’s a good idea to talk to an insurance broker about your options before making the decision one way or the other — because each freelancer operates a little differently and takes on different projects, it isn’t possible to give advice on insurance without personal knowledge of your business. As your freelance business grows, however, it is important to revisit the question of insurance and take steps to protect your business and your finances.
Admin note added 2/19/2010: Verbatim source is http://freelanceswitch.com/freelancing-essentials/errors-and-omissions-insurance-do-freelancers-need-it/