How Can Freelancers Protect Themselves from a Business-Ending Lawsuit?

Kate Dore

In Part 5 of our Financial Toolkit for Freelancers and Entrepreneurs, we tackle how to protect your assets when a business relationship goes south. Read previous installments here.

Even though we self-employed people are by definition solely responsible for our work, most of us never consider liability insurance until we see friends or colleagues in legal trouble and we worry we may be next. You can’t predict your odds of being sued by a client, but you can certainly minimize your risks. Our guide decodes the confusing world of freelancer liability insurance—and why you can’t afford to skip it.

These are your liability insurance options

When it comes to liability insurance, there are several options to choose from. These four choices are most common, and some clients won’t work with you if you don’t have some form of coverage. No matter the insurance plan, you need to know exactly what is covered, your deductible, any caps, and what is excluded.

General liability insurance protects your business from damages other than professional negligence. Most policies cover injuries, property damage, and medical payments. You also could be sued for advertising issues like slander or copyright infringement. Generally, your policy will pay for legal expenses up to a specified limit.

“General liability insurance is good for all freelancers,” says Ross Menke, a Nashville-based certified financial planner and founder of Lyndale Financial. Everyone wants a successful relationship, but sometimes projects get off track. Miscommunication happens, and you never know how your client may react. If you end up in court, legal and attorney’s fees add up fast, Menke notes.

Professional liability insurance (PLI) — also called errors & omissions (E&O) — covers your services and advice. Mistakes, negligence, or incomplete work aren’t covered by your general liability policy. Most PLI policies are “claims-made,” which means they must be in place before the event and claim happen. But “occurrence” plans usually have less strict requirements. Occurrence policies may cover you for a claim that happened while you were covered, even if you later cancelled the policy.

Menke recommends professional liability insurance for anyone in the business of giving advice, such as personal trainers, marketing consultants, financial planners, among others.

Business owners policies (BOP) bundle liability policies together. These packages may be cheaper than buying individual policies. They can include business property, general liability, business interruption insurance, and more.

If your business includes office space, lots of equipment, or employees, this type of policy may help cover those significant costs if an unexpected claim eats into your profits. Menke says this is less commonly used by solo freelancers—especially in the early stages of their business when overhead is low.

Cyber liability covers you for data breaches. If you collect sensitive client information like Social Security numbers, credit card numbers, driver’s licenses, or bank account numbers, you may be vulnerable to hacks. High-profile leaks from companies like Equifax are a painful reminder it can happen to anyone—and recovery is expensive.

Here are some expenses your cyber liability policy may cover:

  • Legal fees from a lawsuit

  • Informing clients about the breach (which may be state law)

  • Personal identity restoration

  • Recovering stolen data

  • Repairing damaged software

  • Ongoing credit monitoring for affected clients

“Cyber liability may be part of a professional liability or business owner’s policy. But not always,” Menke adds.

Here’s where to shop for liability insurance

Shopping for insurance may feel daunting. Here are Menke’s suggestions on where to start:

1. Professional trade organizations: Your first stop should be your professional organization(s). They may have negotiated group rates for an industry-specific liability policy, cutting back on your need to comb through the fine print of a generic policy. While these plans may need less tailoring, they still require careful review.

2. Freelancers Union: The Freelancers Union has also done the heavy lifting for you, partnering with an outside company to offer policies as low as $22.50 per month. According to their website, these plans are customizable with limits up to $2,000,000.

3. Your existing insurance company: Do you have homeowners’, renters’, or auto insurance? It may be worth speaking with your provider about adding liability insurance at a discount. If they don’t have a liability division, they may offer a referral to a company they have vetted.

Regardless of which option you pick, selecting a policy requires your full attention. Menke says you can expect to pay about $25 per month for a general liability policy. Professional liability may set you back $500 to $2,000 per year.

How much liability insurance do you need? It depends.

It would be easier if there were a simple rule of thumb for insurance coverage limits. Unfortunately, because freelance gigs are so different, there is no one-size-fits-all: your coverage needs depend on where you live, your exact services offered, number of clients, and more. A local attorney or insurance agent can identify how risky your work is. They should be able to estimate a coverage limit that matches your business needs—and helps you sleep at night.

Not all liability insurance policies are equal

It may be tempting to buy a generic policy online and cross it off your to-do list. Menke says this is a mistake. It’s important to shop around, get several quotes, and compare protection.

“Make sure your policy is specific to you and your business. You could get stuck paying premiums that don’t cover your work,” he says. Your policy needs to specify the exact services you are providing.

Before signing a contract, ask about your insurer’s claims process:

  • How quickly do you need to report an incident?

  • What proof and documentation does your insurer need?

  • How long does it take to file a claim?

  • Is there anything that may prevent you from being paid?

  • What are the consequences of filing a claim?

Spending extra time shopping around now will be well worth the effort if and when you need file a claim.

Liability insurance is non-negotiable for freelancers

It’s hard to imagine client relationships going south. But even if all parties start off with the best intentions, it’s possible for things to go wrong. You could end up in an expensive legal battle, putting your finances at risk. Liability insurance offers some peace of mind. You have nothing to lose by seeing what you are eligible for, and it may be more affordable than you think.