Overview of the Professional Services industry
Professional services are occupations in the tertiary sector of the economy requiring special training in the arts or sciences. Some professional services require holding professional licenses such as accountants, architects, lawyers, engineers, and doctors. Other professional services involve providing specialist business support to businesses of all sizes and in all sectors which can include tax advice, supporting a company with IT services or providing management advice.
we can break “Professional Service Firms” (PSF) into three groups:
- Classic PSFs (e.g. law and accounting firms): high knowledge intensity, professionalized workforce, low capital intensity
- Neo-PSFs (e.g. management consultants): high knowledge intensity and low capital intensity
- Professional Campuses (e.g. hospitals): high knowledge intensity, professionalized workforce, high capital intensity
The US and European Union are the largest markets for professional services but firms are expanding in emerging markets in China and India. The US professional services industry includes about 900,000 single location and multi location firms with a combined revenue of roughly $1.7 trillion.
Some of the biggest risks Professional Services firms face
Why is Insurance for Professional Services Organizations Important?
Just as a manufacturer is worried about products liability and a construction company is worried about workers compensation, PSFs have to deal with their #1 exposure head-on.
The threat we’re worried about is a lawsuit from customers or other counterparties who were financially harmed by the performance of (or failure to perform) professional services.
Any one of a company’s clients can claim financial loss. Some examples:
- those who sue their accountants after being audited by the IRS after inadvertently underpaying their taxes;
- those who sue their lawyers for failing to competently represent them in court;
- the patients who sue the company who ran the clinical trial in which he or she participated and was subsequently injured;
- the developers who sue their architects after the city forces them to halt construction due to zoning restrictions;
- the data warehousing company who sues their cyber security consultants after hackers exploit an unforeseen weakness in the new system;
- the high-growth company that sues their insurance brokers for…
Cyber and privacy liability is important as well. By their nature, many PSFs collect sensitive data including PII or interact in some way with their clients’ network or systems. If data is compromised or hackers get to a client through you, your liability could be massive.
Once we move out of the E&O world, however, these companies start to look similar to any other.Most states require employers to purchase workers compensation insurance for their employees. Companies with a high percentage of physical labor on the payroll will have to pay close attention to their workers comp premium and coverage.
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What Insurance do Professional Services companies need?
Cyber Insurance
What it covers:
This protects your organization from lawsuits, fines and penalties arising out of a hacking attack or data breach. It can also reimburse the company for its direct expenses such as breach notification costs, credit monitoring, data restoration and forensic analysis.
Why you need it?:
If you collect any sort of personal or organizational information, have a “login” feature on your site, integrate with another organization’s systems in any way, have employees who could fall for a phishing scam, generate online content such as blog posts or even simply rely heavily on email communications, you need cyber liability insurance. Fintech companies who regularly process transactions are highly visible targets for hackers and, as such, should be protected.
Intellectual Property Insurance
What it covers:
Protects the company and its intellectual property. Policies can work two ways: 1. Defense policies provide legal defense costs if you are sued for an IP infringement 2. Abatement policies help cover the cost of enforcing your own IP rights
Why you need it?:
IP litigation is common and expensive. Companies in innovative, disruptive and/or competitive spaces may face suits from both competitors and patent trolls. For the latter, just having this policy in-force can act as a deterrent. In the case of competitors who may have a more valid claim, the policy provides much needed capital so that the company’s balance sheet doesn’t have to take the hit. (Not to mention the benefit of partnering with an experienced claims team who can guide you through the process).
Directors & Officers Insurance
What it covers:
Protects the company and key individuals from liability related to the management of the organization. Companies that indemnify their executives against certain covered claims can turn to their D&O policy for reimbursement. In addition, if the organization itself is named in a suit, the policy would defend the entity.
Why you need it?:
Ensures the company and its leadership is protected from legal liability related to allegations of breach of fiduciary duty and other management-related claims. It provides the capital required to absorb certain legal costs without mortgaging the future of the entire organization.
Professional Liability
What it covers:
Covers the company if an act, error, or omission committed in the course of the company’s performance of professional services is alleged to have caused a financial loss for a third party.
Why you need it?:
Complex litigation is expensive and, between contract law and the unpredictability of client service, there’s a lot that can go wrong. The policy responds to the threat of professional service disputes by paying legal fees and judgments/settlements from a lawsuit for an alleged failure in the provision of professional services.
General Liability Insurance
What it covers:
Covers the organization from some of the fundamental risks that come with running an technology organization, such as ‘slip and fall’ claims, damage to a third party’s property, products liability claims, damage to rented space, and personal or advertising injury claims.
Why you need it?:
It forms the foundation of any risk management program. On top of protecting the company from legal liability caused by bodily injury or property damage, this coverage is usually required in contracts like office leases and vendor agreements.
Employment Practices Liability Insurance
What it covers:
Protects the organization and its management by paying the costs of defending against certain suits from employees or investigations from government agencies. Common claims include allegations of harassment, discrimination, retaliation, and wrongful termination.
Why you need it?:
If you or the organization itself is named in such a claim, the coverage would defend you and pay the judgment or settlement against you. Keep in mind how easy it is for an employee to start an action that requires a legal defense.
Crime Insurance
What it covers:
Protects the company from loss caused by certain illegal activities. Unlike many other commercial insurance policies, it has nothing to do with defending against lawsuits from third parties. This policy instead reimburses the company itself for loss of money, securities or other tangible property that it directly experiences.
Why you need it?:
Most businesses are exposed to the risk of criminal activity. This insurance protects your company from crimes committed within the company itself as well as crimes committed by people or other factors outside of your company. Common claims include:
- Employees stealing money from the company or clients.
- Inadvertently accepting forged checks or counterfeit money.
- Non-employees stealing from the company’s office or from the premises of the company’s bank.
- Robbery of valuables while in transit under the care of a messenger or armored car.
- Computer and wire transfer fraud.
Workers' Compensation
What it covers:
Provides a legally required coverage protecting employees if they are physically injured or get sick while on the job. Legal requirements vary state-by-state.
Why you need it?:
Fines could be imposed on any company that doesn’t comply with their state’s workers’ comp laws. Employers liability coverage also provides valuable legal defense costs if a lawsuit develops in connection with the injury or illness.
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How much does Insurance for Professional Services Companies cost?
Various factors play a role in determining the cost of insurance for your professional services company. These factors include:
- Location
- Amount of coverage you select (ore coverage typically means a higher insurance premium)
- Number of employees (your potential for a claim grows with each additional employee)
- Number of years you’ve been in business.