If you’re working as an independent contractor, do you need to carry professional liability insurance? For full-time workers, employers are typically responsible for indemnification against claims of intellectual property infringement or issues related to failed projects or dissatisfied customers. But for contractors and consultants, it’s a different story: They usually need to protect themselves through something called errors and omissions, or “E&O” insurance, which protects them from losses related to claims of negligence and other issues. It’s a cost of doing business—and unfortunately, with premiums sometimes running into the thousands of dollars, it can be an expensive one.
Going without insurance can put you in a real position of risk, experts say. Given that IT consultants regularly deal with new technology and software, they often face risks greater than those in other fields, says Michelle Schaap, an attorney at the law firm Wolff & Samson in West Orange, N.J.
IT consultants, Schaap notes, have access to a company’s computer systems and private client information, and often deal with proprietary software. If an infringement claim is made by the company or one of its customers, a contractor’s personal assets could be at risk. Thus, many contractors build the cost of insurance into their fees. (It’s worth noting that a growing number of businesses require independent contractors to carry E&O insurance.)
Whether or not they have insurance, many contractors take steps to protect themselves through the agreements or contracts they sign with clients. Schaap recommends always having language in place that limits your liability, and also a waiver of consequential damages. Those protect against claims that are more indirectly related to alleged failures. If you’re working on software development projects, your agreement should also limit losses related to third-party claims, to make sure you’re not contractually obligated to indemnify the customer against their losses.
One way to insulate yourself from potential liabilities is to use a back-office outsourcer or work through a large consulting firm as its employee, observes Schaap. When you do, those companies become the employer of record, providing a lion’s share of indemnification and issuing a W-2.
Back-office outsourcers work with independent consultants to handle chores like invoicing and provide E&O and worker’s compensation insurance. They charge a fee for their services, of course. For example, Iamindependent in Tenafly, N.J., charges 4 percent of dollars invoiced. Still, for many consultants, the fee may be worth it.
While it’s hard to say just how many contractors go without insurance or some sort of indemnification, it’s a pretty fair guess that many people don’t have it. Weighing the cost of insurance against the value of a job, the scope and nature of a project and your appetite for risk is, after all, a business decision only you can make.
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