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Limit Your Professional Liability Exposure

Safeguard your personal assets by following these six best practices and having the right liability insurance coverage.

Whether you work as an executive in a professional services firm, are a director or officer of a nonprofit or you own a family business (or all of the above!), today’s high-net worth (HNW) individuals face greater exposure to professional liability risks than ever before.

And yet many are underinsured. Nearly 23% of HNW individuals with more than $5 million in net worth report having less than $5 million in professional liability coverage, and only 20% have umbrella coverage limits of $10 million or higher.[1] This means that many HNW individuals face financial exposures in excess of their current liability insurance limits.

Because even meritless lawsuits must be defended, they can threaten not only the business assets of HNW individuals but—without proper professional liability insurance—they can put personal assets at risk as well. This can include a liquidation of assets, beginning with savings and investments (although retirement plans and trusts can provide some protection) and followed by real estate holdings and personal property, including vacation homes and rental properties.

Because each HNW individual and family office will have different exposures and there’s no way to prevent being named in a lawsuit, ensuring that you have the right professional liability coverage and putting the following best practices in place can minimize your risk as well as the time and stress involved in a potential legal defense, should the need arise.

Best Practices for Minimizing Professional Liability Risk1. Create and maintain strong internal controls. In any small business and nonprofit, but especially the family office, make sure to segregate duties; verify and hire reputable internal and third-party service providers with necessary experience to make key decisions; have financial statements audited and more.

2. Preserve transparency. This could mean identifying all the parties involved in a particular business deal up front, or identifying any pre-existing conflicts before a business deal, nonprofit event or campaign.

3. Keep conflicts in check. Make sure you and or the members of your organization don’t have a conflict of interest in either a potential business deal or nonprofit partnership.

4. Utilize contracts when applicable. The best way to protect against claims that aren’t covered under professional liability insurance is to establish clear guidelines, including the rights and responsibilities of all parties through contracts.

5. Build strong customer relationships. It is true that small businesses, family offices, directors and officers and nonprofit board members that demonstrate a genuine commitment to their customers, benefactors and third-party business associates will be less likely to be named in a lawsuit.

6. Revisit our coverage annually. Changes to your business may change your coverage needs. Has your position in the public company changed from member to a director or officer? Have you joined any new boards lately?

Do you need Professional Liability coverage?

What happens when your business or firm fails to meet a client’s expectations? What if a liability lawsuit is brought against you as a director or officer of a company or nonprofit, holding you personally responsible for a data breach or a bad business move? Are you an executive in a family-run office who has provided advice that turned sour?

In these scenarios, you could potentially be held responsible for any harm that “poor” performance has caused to a business or that of a third-party business. That’s when you’ll need professional liability coverage to kick in.

Typically sold in increments of $1 million, a professional liability insurance policy will protect you should someone find fault in your actions or services. Covering only judgments, settlements and defense costs against losses arising from a covered error, omission or negligent act committed in the conduct of your business, professional liability policies do not cover damages or recovery. Additional coverage, including Employment Practices Liability and/or Errors and Omissions policies may be necessary.  

What’s your overall risk management strategy?

Because today’s litigious world doesn’t provide any guarantees, understanding your areas of business and personal risk, engaging in best practices to limit liability and purchasing the right, individualized professional liability policy are all a part of a critical risk management strategy for HNW individuals. 

[1] ACE Private Risk Services (March 2012). Targeting the Rich: Liability Lawsuits and the Threat to Families with Emerging and Established Wealth.