Insurance Tips and Traps for Consultants
by Scott Simmonds, CPCU
Let’s try to simplify some of
the insurance issues consultants have to deal with
in running their practices.
Errors & Omissions
Also called professional liability insurance,
E&O coverage protects consultants from suits alleging
poor decisions or bad advice.
Policy Language - There is
no standard professional liability policy for consultants.
Each insurer will offer its own coverage. A detailed
analysis of the insurance contract is required to
judge the coverage offered. The exact definition of
"wrongful act" can affect coverage. What
is specifically excluded from coverage? Does the insured
have the right to refuse a settlement offer in a claim?
Does the policy pay on behalf of the insured or indemnify
the policyholder?
Wrongful Act - Professional
liability insurance protects consultants from allegations
of a "wrongful act" defined by most policies
as "An act, error, omission, misstatement, misleading
statement or neglect or breach of duty". Policies
specifically don’t cover bodily injury, property
damage, and claims arising out of the use of a car,
boat or plane. Also excluded are claims resulting
from an employment injury or employment practice.
All such events are covered by other policies—general
liability, auto liability and workers' compensation
insurance, for example. Professional liability insurance
protects a consultant from allegations that the job
was not done right or that the job was not done well
enough.
Defense Costs - In addition
to any award that is made against a consultant in
a lawsuit, professional liability insurance pays for
the cost to defend a suit. Many errors and omissions
policies pay defense costs from within the policy
limits. If you have a $1,000,000 policy, the cost
of your attorney is part of the maximum payment of
$1,000,000.
Claims Made Coverage - Most
liability insurance policies (general liability, automobile,
workers' compensation) pay for events that occur during
the policy period. For example, an auto insurance
policy will pay for an accident that occurs while
the policy is in force. Professional liability insurance
is usually on a "Claims Made Basis"—the
policy pays for lawsuits brought during the policy.
Many legal actions are brought years after the actual
event occurs. Allowing coverage to expire can jeopardize
protection.
Deductibles - Sometimes called
retentions, deductibles are the part of the claim
you pay before the insurance company steps forward.
High deductibles ($5,000 or $10,000) are a great way
to control premiums.
Disability Insurance
Insuring your earning capacity is vital.
Even the young and strong become disabled. Actuarially,
a 35 year-old is seven times more likely to be unable
to work due to accident or illness than he or she
is of dying.
Limited Selection - Many insurance
companies will shy away from freelancers and consultants.
The concern is with the volatility of income and the
lack of workplace supervision/outside judgment on
work output. Those new to consulting may have a tougher
time qualifying for coverage without an earnings history.
Workers compensation may be a valid alternative in
many states where business owners can buy coverage
on themselves. Obviously protection is limited to
work-related accidents. We work all the time, though,
don’t we?
Coverage Amount - Most insurers
will tell you the amount of coverage they will offer
based on your income history. It will usually be about
60% of your net income. Some insurers will reduce
the coverage based on fluctuating income or for working
out of the home.
Waiting Period - Think of this
as a deductible. It’s the time you must be disabled
before the insurance will start paying—30, 60,
90, 120 and 365 days are normally offered. The longer
the waiting period, the lower the premium is.
Own Occupation - Different
insurers use different definitions of disability.
The best use something like, “the inability
to perform the major activities and duties of your
own occupation.” Looser definitions can be as
broad as, “The inability to perform any occupation.”
Such are less desirable. However, they are less expensive.
Have your agent explain the policies being presented
to you.
Length of Coverage Period -
Once you become disabled how long will the policy
pay? Common terms are 1, 2, and 5 years. The best
policies cover you until you become 65 years old.
The longer the term, the more expensive the policy
is.
Premiums - Some policies cannot
be cancelled unless you stop paying premiums. Some
premiums stay the same throughout your life. Work
with your agent. Insurers will charge you more if
you are sick, on medications, or overweight.
Payout Increase With Cost Of Living
- Many policies contain a rider that increases the
benefit based on a cost-of-living index. Some allow
you to increase the coverage while you are healthy,
without evidence of insurability.
Life Insurance
If others are dependant on your income or you have
large debts, then you need life insurance. I like
term insurance from a strong company. The only people
I hear from that recommend universal life or whole
life (also known as “permanent insurance”)
are selling the stuff. Term coverage lets you buy
a lot of death benefit for a relatively low premium.
Consider multiples of your income as
a method for deciding how much insurance to buy. Review
your family’s needs with you out of the picture.
Then determine the principle needed to generate that
amount over a number of years. Think of life insurance
as a way to fund a savings account on which your family
can draw if you die.
If you make $75,000 your family may
need 70% of that to live on. Using a financial calculator
you can determine how big a pot of money you need
at a certain interest rate for $52,500 to be paid
in interest. Some people want the income stream to
last forever—some want the money to last for
five or ten years. My website has a free calculator
that will do the math for you—www.insurancewiz.biz.
Go to the section on free stuff.
Once you know how much money your family
needs you can determine the amount of life insurance.
Some people just buy seven times their salary. Some
buy seven times their income plus $50,000 for immediate
expenses.
The key is planning and follow-through.
Oh, make sure you have a will too.
Home Office Coverage
Many consultants operate out of a home
office. Don't rely on your homeowner’s insurance
to protect your business property. Also, the homeowner’s
policy will not provide you with business liability
coverage. Talk to your agent about a "Business
Owners" policy.
Auto Insurance
Most consultants are adequately covered by a personal
auto policy. Make sure your agent knows that you use
the car in business, though. You should have at least
$300,000 of liability coverage. Consider a $1,000,000
umbrella policy for extra liability protection. Buy
the offered coverage when renting a car from Hertz,
Avis or another short-term rental company. Their contracts
make claims a nightmare. Your credit card company
may provide collision damage waiver coverage as a
cardholder benefit. Call the toll-free number on the
back of your card.
Workers' Compensation
Workers' compensation pays for injuries to employees.
Most states require coverage if you’re an employer.
The premium should be about $300 for an office assistant.
You may be able to buy workers’ comp on yourself
as a way to buy some protection if you can't find
health or disability insurance. Talk with your agent.
Pick Your Agent
Your agent should have a working knowledge
of professional liability insurance and the marketplace
for consultant’s errors & omissions. Talk
with your peers and friends. Not every insurance agent
has the expertise to find you the right coverage.
Find one agent for all your insurance needs—business
and personal. Sit down with your agent at least once
a year to discuss your business and insurance needs.
Scott Simmonds, CPCU, is an insurance
consultant. He and his firm, Insurance Consultants
of Maine, never accept fees or commissions from insurance
companies or agencies. His work for insurance buyers
is unbiased. Scott can be reached at www.icofmaine.com
or 207.284.0085.
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