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Professional Indemnity Insurance for Management Consultants

Written by

Shaun McGowan

As a Management Consultant your clients are turning to you for professional guidance on how best to structure, position and run their business in order to optimise performance and profitability. Your advice can impact their business for years into the future. They are entitled to rely on the information you give them, because you are holding yourself out as an expert who is qualified to advise them.

This makes you legally responsible for the outcome of your advice. Which means that even if you provide advice in good faith, if your client loses money, market share or reputation as a result they can sue you to recover their losses. They may claim that:

  • Your advice was inaccurate or unsuitable for their business
  • You failed to inform them of something relevant that damaged their business
  • You breached their confidentiality
  • You did not deliver the outcomes you promised

Even if your advice is based on information provided by your client, and you are working in collaboration with their business leaders throughout the process, you are still at risk of a negligence claim.

Why do Management Consultants need professional indemnity insurance?

If you’re running a Management Consulting business, it’s crucial that you have professional indemnity insurance (PII). Here are just a few of the reasons why:

  • Many businesses won’t hire you as an advisor unless you have adequate insurance to protect their business if your advice has a negative impact.
  • It is very difficult to pinpoint the outcomes of your advice – if something goes wrong in their business clients may seek to recover losses by any means necessary, whether or not your advice was actually a contributing factor.
  • Your valuable reputation is at stake. If a client lodges a negligence claim against your practice, even if it is unfounded, you will need to mount an expensive legal defence could be extremely high.
  • If one of your employees makes a mistake, even something as innocent as emailing a document to the wrong person, you could be held personally for their outcome.
  • Your personal wealth, not just your business assets, is at risk if you are sued for professional negligence.

What does professional indemnity insurance cover?

Even if you already have public liability insurance in place, this will only protect you for any physical damage you may inadvertently cause to another person or their property. You need Professional Indemnity Insurance to cover you if one of your clients suffers a financial loss through following advice you have given them.

Your PII policy covers your legal costs if you need to defend your business against a negligence claim – even if that claim is untrue. It will also protect you against any damages that are awarded against you, up to the limit in your policy.

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How much is professional indemnity insurance for Management Consultants?

The premium you pay for your professional indemnity insurance policy will depend on a number of factors, including:

  • The amount of cover you wish to take out
  • Your turnover
  • Where your practice is located (you will pay different levels of stamp duty in different states)
  • Whether you have made a claim under PII insurance in the past

If you require additional features like retroactive protection or runoff cover, these will increase the cost of your policy.

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Professional indemnity insurance case study

Based on detailed market and consumer analysis they conducted for their client, a Management Consulting firm recommended that the company focus their service offering on a particular niche market.

Although this initially proved a successful and profitable strategy, 18 months later a new competitor entered the market and quickly gained a majority share, considerably impacting the company’s turnover. The client claimed that the consultant had failed to warn them of the low barriers to entry in this niche, and that by focusing on this market segment at the expense of their other service offerings they had permanently damaged their business.

The company filed a legal suit against the consulting firm, claiming negligence.

Damages of close $350,000 were awarded against the consulting firm. The firm paid an excess of only $xx on the claim, which covered both the damages and its $85,000 legal costs.

List of Management Consulting services that need professional indemnity insurance

It is vital that any professional or firm providing Management Consulting services to businesses has adequate PII protection. This includes businesses providing advice in the following areas:

  • Business transformation
  • Change management
  • Communications and technology
  • Contracts and proposals
  • Exit and succession planning
  • Financial management
  • Interim management
  • Market analysis
  • Market positioning
  • Mergers and acquisitions
  • Operational streamlining
  • Performance management
  • Performance optimisation
  • Personnel management and team structuring
  • Project management
  • Relocation
  • Restructuring
  • Strategy and planning

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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