Consulting (Part 4) — Insurance Matters
October 16, 2011
Hal Pomeranz, Deer Run Associates
Many folks who are thinking about striking out on their own are concerned about having affordable medical insurance. COBRA benefits from a previous employer are incredibly expensive and generally are only available for a limited period. But insurers typically don’t want to deal with individuals or small businesses that are just starting out and have no revenue history.
One common option is to take advantage of health care benefits from a spouse or domestic partner. If one member of the couple is working a full-time job with benefits, then the they can carry the insurance load while the other half of the partnership builds their independent consulting business. Of course this doesn’t work if the prospective consultant is the only earner for the partnership.
The other approach I usually recommend is to obtain group healthcare benefits through a membership organization such as the ACM or IEEE. For the cost of relatively modest annual dues, you can access health and other insurance services through the organization’s group plans at much lower rates than you would get as an individual. Aside from these large international groups, there may be local organizations in your area that provide similar benefits and have lower annual dues and/or less restrictive policies about who’s allowed to become a member. For example, when we relocated to Oregon, we found the Software Association of Oregon to be a reasonable choice for obtaining health insurance.
Beyond health insurance, however, there are several other types of insurance that you should be aware of because you will have to carry them during the course of your business:
- General Liability
- This is basic insurance coverage for your business that takes care of problems outside of your day-to-day job. For example, you’re commuting to your job site and you accidentally hit the proverbial little old lady walking across the street. This insurance will help cover the associated costs.
Clients often require that you carry $1-5million in general liability coverage as part of the consulting agreement. The good news is that this sort of insurance is widely available and rates are quite reasonable (tens of dollars annually for each $1million of coverage). The same organization you’re obtaining your group health benefits from may provide access to General Liability for your business.
- Professional Liability
- Also called “Errors and Omissions” insurance, think of this one like malpractice insurance for a doctor. If a client can show negligence or sub-standard work deliverable, this insurance would cover the costs of a claim against your business.
Again, sometimes you are contractually obligated to carry Professional Liability insurance under the terms of your consulting agreement. But frankly, I’m not at all confident that if it comes to a settlement that the insurance will actually provide any benefit. I suspect that there are enough loopholes in the typical Professional Liability policy that the insurer will find a way to not honor their obligations.
So frankly I regard Professional Liability insurance as a tax on my earnings that I’m obligated to pay because of the terms of my consulting agreement. As such, I generally try to find the least expensive policy I can that provides the required level of coverage (usually $1-3million). I’ve seen rates for this type of insurance that are all over the map– from tens of dollars per year to low thousands! Clearly the insurers have not developed decent actuarial tables for this sort of thing.
- Disability insurance covers lost wages– or at least a portion of them– in the event that you are unable to work due to significant medical problems. Particularly if you are the only earner for your household, you may wish to look into this type of insurance. As consultants there’s no “safety net”: if you’re unable to work, then you’re unable to bill, and the money stops coming in.
The only problem is that disability insurance is very expensive, requires a major medical workup, and also requires that you pay premiums for some period of time (a year or two) before the benefits actually become available. I’ve never been able to find disability insurance for any price I’ve been willing to pay.
In the absence of disability insurance, you have to “self insure”. I’ve mentioned keeping “six months of expenses” in the bank against hard times. In my case, I actually have a year or more worth of expenses in various liquid investments that I could cash in if the need arises. If I can’t figure out a way to start earning again in that time, then something more drastic will have to happen (like selling our home and living off the proceeds).
One more insurance item that you ought to think about is the cost of replacing all of your computer equipment and other office furnishings in the event of a fire or other disaster. If you’re running your business from your home as I do, you may be counting on your homeowners policy to cover the cost of replacing all of your equipment. But you’ll probably be surprised to learn that your homeowners policy does not cover this in most cases– or at least not the replacement cost of purchasing new equipment. Talk to your insurer. You may be required to take out a special “rider” at an additional cost to cover these expenses.
You’re also going to need to think about how you’re going to replace lost customer data and all of your business records in the event of a disaster such as this. Our accountant keeps copies of all of our critical business records in his offices (which are in a different state from where we live). And we do a weekly backup of all of our critical data to an (encrypted) external hard drive that gets put into a secure storage facility that’s distant from our home offices (actually we have two hard drives that we swap in and out). So in the event of a disaster, we should never lose more than a week’s worth of data.
As a consultant, there’s enough stress in your life without worrying about what’s going to happen if there’s a major medical issue or other disaster in your life. Preparing for these possible calamities in advance– whether through commercial insurers or “self insuring”– can free you up to focus on other important issues like helping your clients and growing your business.