If you’ve recently started a consulting business, an important concern could be your legal obligations and accountability to your clients. Your clients count on you to provide guidance or a specific service – depending on the nature of your work – that will help them meet certain goals and benefit their business. You owe a professional duty of care to them and are therefore liable for any losses or damages arising from poor advice, delay in offering guidance, negligence or failure to render the agreed-upon service.

In other words, you have professional liabilities to manage. Without it, your business can suffer financial and reputational harm. Here are some tips that consultants should consider to manage risks and liabilities in an informed manner.

Understand ‘contractual’ versus ‘tortious’

Liabilities can arise out of your contractual duty, where there is a contract in place between you and the client. Liabilities can also be tortious, arising in the absence of a contract, when the law deems it your professional duty to deliver services to certain standards of conduct. Depending on the exact services you offer, your tortious liability risk may be minimal or considerable. It is best to investigate this matter with your attorney to determine how much professional liability insurance you must purchase and whether you also need errors and omissions coverage.

General guidelines on minimizing risks

• If you advise on matters related to healthcare, compensation or personnel management – that are quite heavily regulated – identify a good attorney and maintain a long-standing relationship with them for on-going advice when laws change and affect your professional duty of care.
• Get everything that you have negotiated with your client in writing, with the necessary sign-offs. Every short- or long-term contract you sign must follow this best practice, no matter how reputable and trust-worthy the client.
• Run your consulting business from your home? If a visiting client slips, falls and suffers an injury at your residence, they may bring a bodily injury claim against you. To be on the safe side and avoid unexpected shocks, purchase general liability insurance that will cover the medical costs of the injured client.
• If a client asks to specify potential liabilities in contracts, limit the liabilities to the total fee amount or do not work with the client.

Claims that can potentially arise

Consultants must be cognizant of the different types of claims that can potentially arise during the course of their professional relationships with clients. One is ill advisement: your client can claim that your advice caused them a loss of revenue or impacted some aspect of their financial performance. In this case, your professional ability will be called into question.

Liabilities can also arise from errors in documentation or data entry, glitches in a system you designed, and failure to protect or unintentionally exposing client data. Errors and mistakes, although seemingly small, may have a big impact and cost the client thousands of dollars. If the glitch can be traced to you, the client will no doubt hold you culpable and proceed to recover losses from you. A different instance is when you miss a deadline on a project, which causes the client financial loss.

Even the most proficient consultants need adequate coverage to prevent lawsuits from jeopardizing their business. Ideally, you need general liability and professional liability. By putting these safeguards in place early on, you can focus on growing your business with peace of mind and confidence.