Like most tech freelancers, you probably concentrate on clients and the work itself. But the administrative side will help you build and protect the foundation of your business. Whether you specialize in front - end or back - end development, app design, project management, or another area, you should be aware of the potential risks of exposure.
Yup, we’re talking about insurance. Even if you’re doing only “a few small jobs,” you have to protect yourself and your company (no matter how big or small) from a lawsuit that could wipe out your entire savings, and harm your reputation. Think about these scenarios:
- An online retailer has you design a website that has an error in the code and doesn’t take orders properly. As a result, the company loses two weeks of revenue.
- You’re building an app for a client and fail to meet the deadlines. This sets the client’s budget goals back, and it’s looking for someone to blame.
- A client is sued by another party over the use of intellectual property in something that you created.
In each of these cases (and others), a lawsuit can result.
While you may think that only large companies face lawsuits, small businesses and freelancers get sued too. According to an October 2020 report from the US Chamber Institute for Legal Reform (ILR), the smallest businesses face the greatest liability. More than half of commercial liability lawsuits targeted small businesses, which the ILR study defines as those making less than $10 million in annual revenue.
Damage to your reputation and lost time are not the only costs when defending against legal action. The Small Business Administration estimates that legal costs can range from $3,000 to $150,000. We know - that’s a large range to get a sense for what legal fees would really cost. The fact is, it will always depend on numerous factors. The National Center for State Courts has reported that the median cost to defend a contract lawsuit is $91,000. And that is even if you win.
Using a solid contract for your work can help prevent or resolve many disputes. So can a good professional liability insurance policy.
Insurance for Your Freelance Business
Matt Lally is a growth marketing consultant who advises venture - backed start - ups. He stresses the importance of protecting both your business and personal assets. “You need general liability insurance and errors and omissions,” says Lally. “These protect you from someone [suing you after] getting injured at your business or from errors in your work that cost your client money.”
But it’s not all about falls and mistakes. The following are five types of insurance policies to consider, depending on the size and offerings of your freelance business.
1. Errors & Omissions (E&O)
Errors and omissions (E&O) insurance, also called professional liability insurance, is designed to protect you in case a client sues you for:
- Mistakes or alleged mistakes
- Professional negligence
- Breach of duty of care
- Misleading statements or advice
- Claims resulting from performance (or nonperformance) of your services
Two types of professional liability policies are available:
Occurrence: An occurrence policy only covers incidents that happen while the policy is in effect; the date of when claims are filed is irrelevant.
Claims-made: A claims - made policy covers claims that are made while the policy is in force, even if the incident happened before the policy took effect.
2. General Liability
General liability insurance is intended to cover you if someone is injured or property is damaged and you are at fault. Liability can come into play in a variety of ways, such as:
- You are working at a client’s location, and your actions cause injury to a person or property damage.
- You are working on a client’s piece of equipment, and your actions result in damage to the equipment.
If you work remotely and have no contact with clients or equipment, your risk is lower. However, general liability may cover you for other situations, such as being sued for defamation, libel, or slander. For example, companies may sue you for misrepresenting your relationship with them or making untrue statements about them. Those types of claims usually fall under general, not professional, liability.
3. Property Insurance
When you work a side job or as a freelancer and use your own equipment, check whether your renter’s or homeowner's policy covers business - related equipment in case of fire, theft, or vandalism. If you rent workspace and do not need to insure the building where you work, you could potentially get a special “Business Personal Property” rider on your general liability policy.
4. Business Owners Policy
A business owners policy (BOP) bundles general liability and property insurance into one policy. It is most commonly purchased by business owners who own the building in which they work because the BOP policy insures the building itself as well as the items inside it.
5. Cyber Liability
Cyber liability is a specialty type of insurance that generally provides coverage against claims resulting from theft or loss of first - or third - party data.
“Specifically, freelance web developers need third - party cyber - insurance coverage that includes claims related to unlawful disclosure of a third party's information and infringement of intellectual property rights,” explains Nir Kshetri, professor in the Department of Management at the University of North Carolina in Greensboro.
Kshetri recommends cyber liability insurance for IT consultants, software and app developers, security consultants, and web hosting businesses.
As a web developer or tech consultant, you almost certainly store and work with clients’ confidential and proprietary data. If a breach exposes this data, your client may try to hold you responsible, regardless of fault.
Also called cyber risk insurance or data breach insurance, cyber liability insurance can help protect you from damages resulting from breaches.
Protecting You and Your Business
Even if you don’t want to purchase insurance, you may not have a choice. Back in 2002, Meredith Little, a writer for TechRepublic noted the requirement starting to build momentum, saying, “You may find that many computer - consulting companies are requiring their 1099 workers to carry professional liability insurance coverage in an amount equal to their own.” She went on to explain that “risk isn’t based on the likelihood of you losing a lawsuit but rather that of a client bringing one against you” since you could go bankrupt just defending yourself against the claim.
Getting started as a freelancer may feel challenging, but setting up a defensive strategy to protect your assets is one of the easiest no - brainer things you can do. Good luck!
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