Definition and Examples
A workers’ compensation liability insurance policy protects freelancers, contractors, and other small business owners from financial losses in the event they face lawsuits from their clients or business partners due to unsatisfactory work. This insurance covers the employer’s legal fees and any judgment costs.
How Does Freelance Liability Insurance Work?
Small businesses face many potential sources of loss. Freelance liability insurance protects business owners from one of the unexpected costs associated with running their business: lawsuits. Operating a business without freelance liability insurance puts the employer at risk of being personally liable for breach of contract, negligence, or accidentally injuring someone. If someone files a lawsuit and obtains a judgment against the employer, it could result in losing their personal bank accounts and property.
In addition to negligence, freelance liability insurance covers other issues such as breach of good faith and fair dealing, inaccurate advice, and misrepresentation. Generally, coverage does not extend to non-economic losses or losses arising from intentional or criminal acts or dishonest behavior.
Note: Some states require lawyers, doctors, and other professionals to have freelance liability insurance. However, many independent business owners can benefit from this protection regardless of state laws. Some professionals who may benefit include freelancers, consultants, accountants, lawyers, healthcare workers, architects, engineers, home inspectors, and real estate agents.
For example, suppose a real estate agent has freelance liability insurance and sells a house to a young couple. After the sale is completed, the couple discovers that there are serious problems with the property. They decide to sue the agent for failing to disclose the issues. If the courts determine that the agent did not exercise “reasonable care” and the couple’s lawsuit is successful, the insurance will cover the agent’s trial costs and the amount of the judgment.
After purchasing the insurance policy, business owners should review it once a year to see if any adjustments are needed due to changes in circumstances.
Types of Freelance Liability Insurance
There are two types of freelance liability insurance policies:
1. Claims-made policy: This is the most common type of freelance liability insurance policy, requiring that the policy be active at the time of the alleged incident, as well as when the lawsuit is filed. A claim can only be paid if both of these conditions are met.
2. Occurrence policy: This is the second type of policy, known as an “occurrence” policy, which covers events that occurred during the coverage period even if the lawsuit is filed after the policy has ended. This would be suitable for someone who has retired or changed professions.
Note: Directors and officers liability insurance is a type of specialized liability insurance that covers directors and officers in for-profit companies, private companies, nonprofit organizations, and educational institutions. The policies cover claims arising from management decisions that may lead to negative financial consequences.
Key Takeaways
– Freelance liability insurance policies help protect businesses from losses resulting from negligence and malpractice claims.
– Professionals who may benefit from a freelance liability insurance policy include freelancers, consultants, healthcare workers, and lawyers.
– The two primary types of policies are claims-made policies and occurrence policies. Freelance liability insurance policies are generally claims-made policies.
– With claims-made policies, the lawsuit must be filed while the policy is in effect.
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Source: https://www.thebalancemoney.com/what-is-self-employed-liability-insurance-5323317
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