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E & O insurance for consulting
Old 02-14-2009, 07:30 PM   #1
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E & O insurance for consulting

I recently established an LLC to do research and consulting for nonprofits. I expect the work will mainly involve program evaluation (documenting the results, or lack thereof, of nonprofits' services) and some organizational planning, grant advising, etc.

Among professional evaluators/consultants doing similar work, the consensus seems to be that having Errors and Omissions insurance is a good idea in case something goes wrong on a project and the client is inclined to sue you for being negligent. However, it's a very rare person who has ever needed to use the policy. They cost about $1200 annually, plus you have to buy professional liability before you can get the E&O policy, so that's another couple hundred per year.

Right now I'm covered through another consultant for whom I'm subcontracting. But when I (hopefully) get to the point of working on my own, I'll have to decide if the insurance is worth it. Does anyone have any advice about this?

My understanding is that part of the point of setting up the LLC is to separate my personal finances from the business finances. I'll also have a separate checking account just for the business. So that protects my personal assets, right? And the business won't ever have substantial assets, since I'll be working from home and require very little equipment and such - computer, printer, fax, and that's about it.

So what would be the benefit of having the insurance? Is it so that if I did ever get sued, the insurance company would handle the hassle of it? Is it that if I didn't have insurance and lost a lawsuit, I'd potentially have to declare bankruptcy for my LLC and start over?

Part of me buys into the idea that $1500 per year isn't that much to pay for additional security. But then I also wonder if people are just buying into insurance company scare tactics.

Thanks for any help or thoughts on this.


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Old 02-15-2009, 06:41 AM   #2
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We pay several hundred a year to insure DW even though the likelihood of her ever being sued is beyond remote. Why? My understanding is that if you personally are providing professional servivces it is not that hard to pierce the corporate veil and go after you personally (not just your LLC). In addition, if you are sued, the costs of defense could break you if you didn't have an insurer on the hook for the defense.

BUy the insurance.

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Old 02-15-2009, 01:32 PM   #3
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I think that:
(1 - chance of never being sued during yy consecutive years)x(cost of defense + cost of judgment)
is less than
(annual cost of insurance)x(yy consecutive years of insurance)
insurance is a bargain.

For example, I bet Legg-Mason's Bill Miller is beginning to wish he'd bought some sort of portfolio insurance for years #16 & 17...

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Old 02-17-2009, 09:57 AM   #4
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Ok, insurance it is. Thanks!

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Old 02-17-2009, 10:09 AM   #5
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Good choice, in this society, when out on a venture, such as consulting, where your decisions can influence thousands, perhaps millions of dollars, buy the coverage. Good choice, just shop around a bit.

Prof liab and e & o is the way to go.

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