For firms that provide consulting services, Professional Liability (PL) insurance provides broad financial protection against third party E&O claims for advice and services rendered to clients. The risks of not carrying this type of insurance are high, as it can adversely affect the firm’s financial balance sheet, brand, reputation and corporate good will. Carrying PL insurance is an effective means of financial risk transfer for the entire practice.

The Client Contractual Process

Risk in consulting activity is mostly governed by the client engagement process, with notable exceptions for certain regulated types of consulting activities. The firm and the client agree on the terms and conditions of the engagement by setting out the scope of services to be provided under the engagement and formalize this in a written contract. The firm will seek to manage their risk by asking for a specific cap or limitation of liability before performing any services for the client. These provisions typically cap any damages resulting from the firm’s and its employees’ negligence in providing services to a value of the fees earned under the engagement or some multiple of this.

The consulting industry has adeptly managed this process with clients for years.

But developing severe E&O claims and emerging risks may affect how consulting firms handle client engagement in the future. An important emerging risk involves the treatment of confidential data in the client engagement process. Both public and private sector clients are requiring greater safeguards and measures in the contractual treatment of remedial efforts involving a data breach event. This impacts limitations of liability and indemnification provisions in the contract but also it impacts insurance.

In this environment it is vital for consulting firms to ask themselves two critical questions to prepare for making an informed decision around PL limits adequacy:

• What high level consulting industry claims trends are testing limits?
• What are peer firms purchasing and why?

Claim Trends

We believe the following consulting firm E&O claims trends should be reviewed when considering the adequacy of PL limits.

• Claims are being brought against consulting firms by individuals and entities other than their clients, including claims brought by business partners, independent contractors and competitors. These claims arose from a wide range of consulting services, from technology consulting, like software development and implementation projects, to pure “management” consulting.
  
  
• Severe claims are being brought against consulting firms by regulatory authorities. Some cases involved allegations of bad work, but other cases involved cyber breaches or ransomware events.
  
  
• Courts may invalidate limitations of liability provisions in client contracts. This has occurred in several severe publicly known E&O claims against consulting firms, with a few involving allegations of gross negligence. Importantly, a standard limitation of liability provision in a contract between the client and the consulting firm will support the firm’s defense when it is the client that brings the lawsuit, not a third party. A possible exception to this concept is if the firm has a limitation of liability provision in a contract with a contractor or business partner.
  
  
• Since 2018, we have seen at least nine publicly known matters where the total of settlements and defense costs exceeded US$75 million, with settlements ranging from US$75 million to US$500 million.
  
  

Peer Purchasing Habits

National and global consulting firms tend to buy PL and cyber insurance on a combined or blended basis out of North America. While this is the predominant trend for most firms, several firms purchase stand-alone PL and then purchase a separate cyber insurance tower.

The reasons for purchasing stand-alone PL vary firm to firm. Factors include: 1) concern for dilution of limits, 2) concern for breaches of confidentiality of client or third party information, 3) inherent riskiness in certain types of consulting activity, and/ or 4) limited availability of contractual protections.

Summary and Takeaway for Consulting Firms

Given these compelling trends and the evolving risk environment, firms should evaluate their PL insurance limits as part of the annual renewal cycle.

Factors to consider in evaluating PL insurance limits include:

• What is the firm’s appetite for risk?
  
  
• Are there services being provided by the firm that might be considered more inherently risky than others?
  • And could such riskiness lend itself to a severe E&O claim being brought against the firm? Such as an elevated duty of care under the law or other ramification?
  • For such services, are there contractual protections such as a limitation of liability available to the firm? Do such protections apply to the firm’s legacy work?
  • What are the odds that such a severe E&O claim could be brought by a client, a regulator or any other entity/person other than the client?
  • If such a severe E&O claim resulted that exceeded the firm’s current PL insurance limits, would the firm’s financial balance sheet be able to sustain such a loss? What about if there were two back-to-back severe losses?
    
    
• What does the publicly available information about large E&O claims against consulting firms say? What are the predominant trends of such public claims information?
  
  
• Is the firm planning to expand into new or different service lines and/or geographical locations?
  
  
• Has the firm made an acquisition or is planning to make an acquisition?
  
  
• What are peer firms currently purchasing and why?

Contact

The Professional Services Practice at Aon values your feedback. To discuss any of the topics raised in this article, please contact Vincent Santorelli or Catherine Jones.

Vincent Santorelli
Senior Vice President and Executive Director, Consulting Firm Co-Leader
New York



Catherine Jones
Senior Vice President and Executive Director, Consulting Firm Co-Leader
New York