How much could you cost your client’s business if you make a mistake or give them bad advice when working for them? As a consultant, your client trusts you to give them expert advice. We’re all human and therefore make mistakes, and sometimes those can be extremely costly - both to your business and theirs.
If you’re ever unlucky enough to find yourself in a situation where you’ve been accused of professional negligence, did you know that you could be liable for a claim against your business for consequential losses?
What is consequential loss?
Consequential loss is a term used to describe a financial loss suffered by your client that’s indirectly due to your mistake or professional negligence. It means that if you make an error at your client’s expense, they could claim compensation for revenue they expected to make but were unable to because of your actions.
Consequential, or indirect, losses differ from direct losses as they do not arise naturally from the breach of contract or professional duty. That being said, they must be directly traceable to the breach of contract and they tend to be circumstances which could have been reasonably anticipated at the time of drawing up the contract. They are only recoverable if the damages were foreseeable by the client. This means that loss of profit/earnings would not necessarily be included in this context; that tends to be considered a direct loss.
However, consequential losses could end up being far-reaching - think about the payment of salaries if a project runs overdue to your oversight, extended overhead costs, financing costs and other ongoing obligations payable regardless of business profitability. Anyone could be affected by a consequential loss and it’s in your best interests to protect your business from a costly claim.
Examples of consequential loss
As a consultant providing professional services, your clients trust you to act in their best interests. Yet all it takes is one small error and you could find yourself in trouble; potentially facing a hefty claim from a disgruntled client. Consequential losses can easily arise from the following situations:
- Contractual disputes
- Not auditing a company’s accounts properly
- Giving poor legal advice
- Personal injury
Here is an example:
You’re an IT consultant and your business has been employed by a firm to update their billing system. After the implementation they begin to question the performance of the system, saying it isn’t delivering the functionality they expected, and it keeps making errors. A few months on and it’s apparent that a growing number of customers aren’t being billed or are receiving incorrect bills. The client sues your business, claiming for damages including compensation paid to customers, additional borrowing necessary to finance the business as a result of incorrect billing, and stationery and correspondence costs required to notify customers.
It’s worth bearing in mind that if you work from home, there are a number of risks you face which could result in a claim against your business. It could be something as simple as a client tripping on your uneven floors and breaking their arm, rendering it impossible for them to work and them claiming for a loss of earnings. To find out more, read this article: Do I need PL or PI insurance if I work from home?
How professional indemnity insurance can protect you
Consequential loss is usually covered by professional indemnity (PI) insurance.
In short, PI insurance protects you in the event of a claim against you for professional negligence, covering direct and consequential losses to the client. It covers your legal fees and compensation payable to the client, giving you financial protection against the risks and personal losses you’re exposed to as a consultant.
Ultimately, PI insurance exists to give you confidence and peace of mind. It allows you to work without fear of the huge financial losses you could face should you find yourself being sued by a client or third party.
PI policies are provided by specialist insurance brokers like us, who are experts in this field. You can also head to our Knowledge Hub, for similar content to this and the latest industry insights.