Breaking Down Barriers in Miscellaneous Professional Liability

o It's too unlikely I'll ever be sued.

o I can't be held accountable for more than I was paid for the job.

o If a problem arises, I can fix it.

o The state doesn't require a license or certification for my field, so I can't be sued for liability.

Taking a closer look at each one of these justifications for not purchasing coverage reveals the fallacy behind these arguments.

Miscellaneous professional liability suits are fairly common. Annually, about one-in-20 firms will face some allegation of wrongdoing in the course of providing their services.

What's more, claims of professional negligence can be expensive to defend and settle. While the average legal defense costs are $23,000 and average damages paid are $32,000, actual defense costs and damages for an individual situation can be much higher.

Take, for example, the case of a start-up property management firm.

Two individuals with extensive real estate industry experience decided to start their own property management and leasing firm. They clearly had the industry expertise to provide these services and the contacts necessary to get their business off the ground, but had not been involved in the selection and screening of clients at their former employers.

They opted to accept work from a client with which they had no prior relationship and conducted little research on the properties to be managed prior to accepting the job.

Unfortunately, the relationship between the two parties deteriorated along with the condition of the property. Ultimately, the property owner sued for loss of income from his buildings and devalued property value.

The case was settled for $425,000 in damages and $115,000 in legal fees.

Those who render advice or perform specialized business support functions often hold themselves out to be experts in their field. Unfortunately, the fees derived from their expertise are not always commensurate with the ultimate liability for which the professional can be held accountable.

It is a common misperception that damages will be capped at the amount paid for services. However, when problems arise, the client is likely to sue for the full amount of their loss, regardless of how much or how little was paid.

The example of a pre-employment screening service serves as an illustration of disproportionate exposure to fees.

The firm was hired to check the background of an accounts payable clerk for an apparel retailer. A criminal check of two counties revealed a clean record. After the employee was caught stealing, the retailer sued the service, alleging the employee held two prior felony convictions for grand theft in other counties.

The case was settled for $115,000 in damages and $37,000 in legal fees. The screening service charge was only $500 for the background check.

It's not unusual to see cases against professionals who did nothing wrong. Since plaintiffs' lawyers have only a limited obligation to investigate a client's allegations, suits are sometimes filed with incomplete or incorrect information.

With the cost of defending your innocence at trial easily reaching into five figures or even six figures in complex cases, a suit can easily drive a small company out of business.

What's more, the defendants often feel strongly about defending themselves. A claim is viewed as a personal attack on the professional's reputation, which could result in sanctions from a certifying body and lead to a loss of business.

It's not always feasible to "make things right." By the time a client expresses dissatisfaction, it may be too late to redo the job or correct problems. Once a client has lost faith in the firm, the client will be looking for a replacement service provider and a lawyer. And no matter how adept the professionals' skills may be, unclear communication, differing expectations and changing circumstances can throw any project off track.

Take the example of a computer consulting firm hired to recommend software for an organization's enterprise management system.

After extensive research, the firm identified a software solution and although they were not engaged to do so, aided in the implementation of the new system. After some initial setbacks, the firm and the software vendor were able to make the system functional.

Unfortunately, the client felt they had suffered significant loss of business as a result of the delays. While the consultant recommended the solution the client was seeking and was able to resolve the implementation problems, the consultant was sued.

The case resolved for $32,500 in damages, but cost $80,500 in legal fees.

It's commonly known that the courts hold licensed professionals–like accountants, lawyers and engineers–accountable for the consequences of their work. While few states require any form of professional licensing for consultants or technology professionals, the lack of a licensing standard doesn't mitigate the liability faced by professional service firms.

To illustrate the point, consider the case of an agricultural consulting firm.

While crop dusters and other pesticide applicators are licensed by the state, those providing consulting are not.

Among other services, the firm advised farmers on the type and amount of insecticide and fertilizer to apply on crops. A client alleged that melons in two fields were too blemished to sell. In its defense, the consulting firm claimed the farmer applied a generic form of the recommended pesticide and that the melons were marketable. Ultimately the crop was sold, but for far less than that of an unblemished crop.

The suit was settled for $255,000 in damages and $31,000 in legal fees.

Clearly, professional liability coverage is essential in order to protect small and start- up service firms from the potentially catastrophic results of an error or omission in rendering their services. In fact, doing business without miscellaneous professional liability coverage is as likely to backfire as driving your car without auto insurance.