Architects, engineering firms, graphic design businesses and other service providers are increasingly being sued for alleged poor work quality, contract breach or missing deadlines — and jury awards are rising.
The costs of defending against a lawsuit of that type could quickly mount, even if you come out victorious in the end.
But a commercial general liability policy won’t help pay for your defense. You’ll specifically need a professional liability insurance to help cover the costs of litigation, settlements or judgments. Without a policy, the costs can quickly sink a small firm.
The unfunded lawsuit
Here’s a scenario that could leave you scrambling for funds. You run an engineering firm and a manufacturer sues your business after one of the machine parts that you designed failed, causing one of the client’s machines to seize up, resulting in $58,000 in damage to the machine and production downtime.
The lawsuit accuses your firm of negligence. Your business could be facing serious financial hardship as the suit asks for the cost of repairs and the lost production.
Here’s what you’re looking at:
- Attorneys’ fees — Depending on where you live, these can range from $150 to $400 an hour, or more if you go with a topflight law firm.
- Court expenses — Fees for copying, filing and other miscellaneous tasks all add up.
- Other legal fees — You may need to call expert witnesses, as well.
- Damages or settlements — Even if you try to reach a settlement with your client, they may opt to take the case to trial in hope of winning the full amount of the damages they are claiming.
You can see how the costs can quickly mount and if it gets to a damages or settlements stage, the costs will increase significantly.
You should know too that even if the case was frivolous, you’d still have to pay attorneys to defend it and file motions to have it tossed out of court. That alone could run you at least $5,000 in legal fees — a lot of money to pay out of pocket.
In fact, the U.S. Small Business Administration estimated in a recent study that legal costs for litigation ranged from $3,000 to $150,000, and only one-third of small business owners reported spending less than $10,000.
And there can be other fallout, as well. Perhaps word has gotten out about the lawsuit, damaging your reputation and ability to attract new clients and retain existing ones.
And if one client has sued, others who may have held off and had similar experiences could also file suit.
Professional liability insurance
A professional liability policy could have saved you from these significant expenses. The coverage, which is relatively inexpensive, is what’s known as “claims-made” coverage.
That means your policy must be active when the alleged incident occurred and when the claim is filed, in order to receive your benefits.
Client allegations that your work caused them a financial loss are often covered by a professional liability policy.
This type of insurance can cover errors and oversights with your work, as well as legal fees and the cost of settlements or judgments.
Cost: The average yearly cost of professional liability insurance for a small firm, regardless of the limits chosen or the industry of the business, was $985 in 2015, according to the Insurance Information Institute. The median was $758.