The Indian economy is growing fast, and opportunities for service sector professionals in domestic and global markets are booming. Many individuals are beginning their entrepreneurial journey or launching companies with small teams. The road to entrepreneurship can be empowering, satisfying, remunerative, and challenging — all at the same time. So, you need to tread cautiously.
This article discusses professional liability insurance coverage for startups and tips for purchasing such insurance.
Professional liability insurance is an insurance coverage that indemnifies individuals engaged in consulting and advising against financial losses in civil lawsuits filed by their clients. The common basis of such lawsuits is an omission by error and negligence by service providers. So, such policies are also popular as errors and omissions insurance in some countries.
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These policies cover legal costs related to defending the civil lawsuit and costs of compensation, damages, or penalties if the insured loses the case. However, professional indemnity does not cover:
- Criminal lawsuits
- Cyber lawsuits
Liability insurance for professionals usually covers claims to indemnify against lawsuits filed for —
- Oversights in providing services
- Failure to meet deadlines
- Failure to deliver as per contract
- Other types of breach of contract
- Omission by error
- Professional negligence
- Quality lapses
- Failure to maintain standards as per the contract
Professional liability coverage is essential for any service sector entrepreneur and start-up for several reasons, including:
- Most startups involve individuals providing consulting and advising
Complaints of negligence or poor service quality are common among service sector startups and individual entrepreneurs. Other than the Contract Act, filing a civil lawsuit is a standard legal option for disgruntled clients to protect their interests. Without liability coverage, startups can find themselves exposed to the legal maze.
- Defending civil lawsuits can be time-consuming and expensive
Defending civil lawsuits regarding negligence by service providers or similar complaints can be very time-consuming. The more time it takes to defend, the more expensive the lawsuit becomes for a defendant. This can cause a severe dent in the financial health of startups and entrepreneurs. Liability insurance offers protection against similar costs.
- Major clients often require consultants and advisors to have liability insurance
Liability insurance against civil lawsuits can be a mark of professionalism. Many large companies make it mandatory for startups and professionals to have professional liability insurance. Besides, having such policies can also help build an image of a seasoned professional.
- Saves from business disruptions in case of frivolous lawsuits
Dissatisfied clients often intentionally file civil lawsuits against professional service providers without a serious legal basis. Such frivolous cases may not survive in court but can cause severe damage and disruption to the business operations of a startup. Having professional liability coverage can ward off such baseless attempts.
- Learn about inclusions and exclusions
Knowing about common inclusions and exclusions in any standard professional liability insurance policy is essential. It is important to consider such conditions in the context of your business. For example, startups providing technology support may have different requirements than legal or accounting consultancy firms.
- Calculate/Assess how much coverage is necessary
The aim of purchasing any liability coverage is to protect business interests against financial setbacks in legal proceedings related to professional negligence. Low coverage may save money on premium payments but cannot provide necessary financial protection. So, it’s important to have clarity on how much coverage is practically necessary for a startup.
- Compare premiums and add-ons from different insurers
Premiums of liability insurance policies may vary from one insurer to the other, depending on coverage, exclusions, availability of add-on coverage, and reputation of the insurer. Any service sector startup planning to purchase liability coverage must compare premiums from more than one insurer.
Risk management is critical for business sustainability and growth for startups. Along with preventive practices, insurance coverages against perils and other financial liabilities are also necessary to protect business interests. Professional liability insurance is one type of business insurance policy available for startups. So, pick one that offers adequate coverage and lets you focus on your work without worrying about professional hazards.