Errors and Omissions Insurance: Do Freelancers Need It?
Sometimes a project can go wrong in a big way: a website can go down at the worst possible moment, a brochure can get printed with the wrong information, or you can otherwise end up with a very unhappy client. You can do everything you can to solve the problem, but at the end of the day, if your client isn’t happy, you can be facing some major trouble. Depending on the circumstances of the project and the problem, your client may be in a position to sue you or otherwise demand compensation for the problem – a financial burden that many freelancers just aren’t equipped for.
Errors and Omissions Insurance
The best protection in such a situation is errors and omissions insurance. In the event of a major problem, errors and omissions insurance covers legal costs and can protect a freelancer from winding up in a situation where he or she can’t cover legal expenses or damages.
Some bigger clients will require insurance as part of the contract covering specific projects. Todd Adkins, who has been operating Born to Design since 1997, recently began working with a big client who expects any contractor to carry both general liability and errors and omissions insurance. To find coverage took Todd longer than he expected:
“I worked the phones pretty well to get an agent who could come in with an affordable rate. I did find that prices for this are very high, and all over the road. The main problem I ran into was that an agent would give me a “ballpark” on where the cost would land only to come back later with a much higher rate. Early in my efforts an agent told me that I’d likely have better luck going with an independent agent rather than a larger agency because they had more options available to them. In the end, a recent contact (an independent agent) made at a networking breakfast was able to bring both the General Liability and the Errors & Omissions plans together as a package for a comparatively good rate.”
Depending on your client, you may have a little room for negotiation when it comes to insurance. Because of the projects most freelancers work on, errors and omissions insurance can typically cover most of your insurance needs: while general liability does cover advertising injury and other project problems, it’s focused more on protecting your business in the case of bodily or property damage. If you don’t have clients in your office, general liability can be overkill.
You may also be able to negotiate the amount of coverage a client asks for, especially if you have a policy already in place. Todd’s client requested $2 million in coverage, but after some discussion, they accepted $1 million.
Finding Insurance
Jeff Kleid is an insurance broker who works with freelancers, bloggers and other businesses that may not get as much help from insurance brokers focused on bigger businesses. He suggests that freelancers looking for errors and omissions insurance start with finding a broker, but points out that some can be reluctant to work with freelancers:
“If you do find a broker that actively writes E & O insurance, many will lose interest as they see very little upside that the client will grow and most freelancers don’t generate the type of revenue and would not be able to justify what has traditionally been a $1,500 — $2,500 minimum premium.”
However, there are new insurance products becoming available that are geared towards freelancers and other small business owners.
Jeff says, “There is some good news though, one company, called Axis Pro (formerly known as Media Pro) has created a policy just for freelancers, with premiums ranging from $450 to about $1,500 annually, for coverage starting at $100,000 depending on if you are a freelancer, blogger or author for hire.”
Approximately $500 is the starting point for insurance for most freelancers in the U.S, depending on the risk of a problem — if you are a freelance writer covering sensitive topics, for instance, you may find your premiums to be a little higher. If you’re based in another country, you’ll be able to find similar insurance products as well as price estimates through an insurance broker working in your area.
Do You Need Errors and Omissions Insurance?
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.
Disclaimer: You should always seek independent financial advice and thoroughly read terms and conditions relating to any insurance or financial product you plan to purchase. This article is intended as a guide only.
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I have a standard contract that all clients are responsible for proofing their artwork for print. I have yet to have an issue with that.
I agree with the issues you raised in this article. I work with freelancers who are starting up and I never advise them to get insurance. On the other hand, if one happens to be a freelancer who deals with larger companies, then some serious thought should be given to an insurer.
Thanks for such a great article!
This is a great article with cogent information that I’ve never thought of much before. I’ve had a rider on my home owner’s insurance to cover small businesses for many years but Errors and Omissions insurance is something I’ve never heard of and will definitely think over because in the web design business you never know what will be happening with a site you haven’t visited in a long time but who’s owner comes back to you if there are major failures.
Thanks for presenting this information.
Well I just try to have weekly full back-ups of the websites, so I can easily bring them online again if something goes wrong… Thanks
I’ve had insurance since I started out; a rider on our homeowner’s insurance wouldn’t cover equipment used for business purposes. Between a laptop, a desktop, expensive SLR camera equipment, and now inventory for an online store we run, we have a lot of costs that would be out of pocket should something happen. And now that I rent office space, it’s become even more important – liability insurance is a necessity in case someone is injured on my property. I have $20K of equipment coverage and $1 million in liability and pay significantly less than $500 a year.
This is a great point. For about a year now, I have included something of the sorts in all of my contracts, stating that I cannot be held responsible for any damages caused by mis-information, printing, hosting, or any other problems.
Clients have not had a problem with it at all and I stay out of trouble.
Kevin
Kevin and I share the same idea. I’ve had a clause in my agreements for years that I am not liable for errors and omissions. It’s help up well, even with larger clients.
I also don’t act as a hosting solution for my clients, and instead refer them to (and help them set up) a host, so it removes me from that responsibility.
Nice to know that option is out there though.
In this hyper-litigious society, I’m surprised that there is hardly any legal self-defense advice available on-line for freelancers. And what little is there is all over the map: “make sure you incorporate for liability-protection reasons”, “don’t bother incorporating because it provides no liability protection to a one-man company”, “get E&O insurance”, “E&O insurance will cost more than you earn”.
All this liability nonsense hanging over your head, with no consensus on how to cost-effectively mitigate it, is starting to make being an employee much more attractive.
I’ve contemplated whether or not I should purchase this insurance for a while now, considering that my day job is working for a commercial insurance broker.
Insurance isn’t just for working with large companies and what happens when you actually have to defend your contract clause? You’d have to hire a lawyer and then the bills add up. That’s where one of these insurance programs come into play.
Honestly and relatively speaking, insurance is cheap compared to the limits and coverages that it provides.
I have a liability clause in my terms and conditions stating that it is the client’s responsibility to review both the PDF previews I send for correctness and to request and review a preproduction proof of anything produced, as a condition of their acceptance of the final files.
I began doing this after learning that a client had sent a file to print without even looking at the preview beforehand.
As someone who has worked as a Risk Manager in two Fortune 500 companies, and who has both purchased E&O insurance for one of them (at a cost of $3 million plus in premium), and has required vendors to carry E&O in various cases, I think it would be important to understand what and why they might be asking for various insurance covers.
Errors and Omission (AKA Professional Liability or Malpractice) protects you from liability due to pure financial loss (except in the case of medical professionals) where as General Liability policies protect you from third party bodily injury and property damage. I could write pages of things you might be concerned with but will give you this advice right now.
Try and strike the requirement. Many larger risk management departments have specific vendor requirements, that can be waved at the discretion of the risk manager. Sometimes they try and apply requirements that were designed for a 5-10 man shop and fit it into a single shop.
Look for the coverage, but then inform the client that the cost to carrying the insurance will be passed through to them. This is not an uncommon request especially if they are the only vendor asking for it.
Work through a broker, not an agency. Commercial insurance is different than the personal insurance market and a broker that specializes in small business can actually find you quite robust coverage that is better then what your home owner and car insurer can provide. You can go big with the big three, like Aon, Willis and Marsh but some of the smaller commercial brokers are quite good. Depending where you live this could include Mesirow, AJ Gallagher, Lockton Companies, or ABD. Most banks have commercial brokers in house and in fact Wells Fargo owns a quite good one, ABD.
Make sure they get input from their E&O specialist. The coverage is out there. Companies that provide it include, Travelers, C N A, AIG, ACE, Hartford and there are some specialty carriers out there.
Most large clients will have minimum financial ratings for the insurance. Unfortunately, most of your home owner/auto companies will not meet some of these requirements. I usually required the underlying insurance company be rated at A- VII by AM Best.
While many people just get riders to their homeowners, if you have to purchase further insurance, consider a package policy that gives you GL, auto, and property including business interruption coverage.
I could go on but not sure how much room there is but if anyone wants anymore info let me know.
There is always a need for access to legal advice especially when things go wrong like with some of the points you have mentioned. It must be hard if you are working on your own without any backup you leave yourself wide open for liability.
Thanks this article really helped…
This is an interesting article but what freelancer can afford to dish out that kind of money? I can’t even buy a health insurance policy or a vehicle let alone liability insurance. For the elite (lucky few) freelancers who actually do that well and get contracts with nice big firms this is helpful. Of course I would refuse to work with a company that asks me to buy insurance. I’m a writer with a home office and only internet clients and contacts, due to the area I live in. I don’t work onsite and don’t need to so it just seems unnecessary.
You need E&O insurance if you want to play with the big boys. If you’re freelancing for small clients you can dictate the contract terms. If you want to go after large corporate clients you can’t pull “I am not liable” stuff. It’s very competitive and very lucrative to get these kind of contracts. The upside is that these large corps pay significantly higher rates to vendors then most freelancers are used to. It’s worth it!
Sometimes they try and apply requirements that were designed for a 5-10 man shop and fit it into a single shop. You can go big with the big three, like Aon, Willis and Marsh but some of the smaller commercial brokers are quite good.
I am a freelance home inspector and the first thing that I did when I went freelance was to get proper e and o insurance. I have seen enough lawsuits happen to other inspection services to know that if I actually want to make money doing this, it’s pretty important to have some.