As an attorney for service providers, most of whom are professionals, I often get asked about insurance coverage. I hear this one a lot: “If I have professional liability insurance, why do I need a contract with my clients?” Frankly, that’s like asking “If I have cheese, why do I need wine?” Even though each are good alone, they are so much better together!
What is Insurance?
Insurance is a contractual relationship with a company wherein they agree to protect you from certain losses. The contract, or policy, sets out in detailed language what losses they will and will not cover. For professionals, there is a type of insurance called professional liability insurance (commonly referred to as errors and omissions or E&O insurance). This type of insurance protects professional service providers from claims of inadequate service or negligence.
This is basic stuff for us professionals, right? But bear with me for a moment. You’ll see where I’m going.
What does having Insurance do?
If a client were to sue a provider for inadequate service, the insurance company (depending on the policy language) would defend the provider in court. If the defense of the provider is unsuccessful, then the insurance company (depending on the policy language) would pay the determined amount of damages to the client. Hopefully, though, the insurance company’s defense would be successful in court and no damages would be paid.
As the provider, you think that’s right. You have paid the premiums for the policy and the above situation is exactly how things should work. That’s why you have insurance in the first place. Let them handle it.
But there are two things wrong with this attitude. First, you have a responsibility to avoid lawsuits in the first place. Not only can it damage your reputation just by having them filed, but your insurance carrier is going to assess the level of professionalism you have based on the number of complaints. If you have several complaints, your insurance company is going to (very likely) think you are a greater risk and increase the amount of premiums you pay.
Second, if your defense of the claim fails in court, the insurance company (likely) has to pay a large amount of money. Again, this is going to cause your insurance carrier to consider you as high risk and will (normally) increase the amount of premiums you pay.
So let’s recap:
- Damaged reputation by having complaints filed.
- Increased premiums for insurance coverage.
What can I do to protect myself and my business?
Insurance alone isn’t the solution. You have an obligation (and a motivation) to do what you can on your end to avoid having complaints filed. How can you do this? By having a really good (written!) client agreement that (1) clearly defines your services, (2) outlines your responsibilities (3) lists situations you are NOT responsible for, (3) limits your liability if something goes wrong (not all professionals can do this, it depends on your industry regulations – but if you are allowed to, do it!), and (4) establishes honesty and trust in your client relationship right from the beginning (more on that in other blog posts).
Think about having that type of contract. Your clients would know what to expect of you, know what they themselves are responsible for, have a clear understanding of how your relationship is going to work, have a “feel good” attitude about working with you right from the start, and should something go wrong it would (could) limit the amount of exposure you have. All good things, right?
Now apply that to the client complaint situation we went over above. Do you think that having such a (written!) client agreement would reduce the number of people that file complaints? Probably. But it wouldn’t eliminate all the crazy, unrealistic people (who you hopefully avoid working with in the first place).
But let’s say that a complaint does get filed, and now your insurance company steps in. They look at the contract your client signed and see that it has all those provisions that can help defend you in court. Do you think that having such a (written!) client agreement would increase your chances of successfully defending the claim? Do you think it would be easier for a court to see exactly what you were supposed to be responsible for (and what you weren’t)? Most likely. Unless you really did mess up and then (if applicable) your limitations of liability provision would reduce the damage (and the amount your insurance company has to pay, which should keep your premiums from sky-rocketing).
Insurance is good to have, but you shouldn’t rely on it completely. Insurance should only be one part of your overall protection strategy. Having specific contract terms in your client agreements can help a great deal. Not only can it reinforce good relationships with your clients, but it can also help defend and protect you in those situations that don’t go so well. It makes sense to have as many protections in place as you can, so consider the two-pronged approach of insurance + client agreement.