Management Consultants – Common Professional Indemnity Risks

Management and business consultants are often put under pressure to work miracles, whether that be turning around a weakening business or transforming the operations of an inefficient organisation, there can often be unrealistic expectations. Businesses are frequently inclined to sue their advisors if things do not work out, potentially resulting in costly legal fees for the consultant regardless of whether they are at fault or not.

Professional indemnity insurance and good risk management are therefore a crucial consideration for every consultant. Below we are going to take a look at areas that can potentially lead to legal claims against management consultants:

Failure To Perform

Measuring success of failure can be a subjective exercise and personal to the individual judging the situation. Management consultants are often employed to turnaround a failing business. The management consultant may achieve their set goals of making the business more efficient, however it may still fail anyway. They can then find themselves being sued to recover losses.

For example, a management consultant may be bought in by a business to help get their finances into line that would be acceptable to present to a finance provider. The consultant may recommend measures to improve the accounts and finish their contract. Unfortunately, the accounts may be questioned by the finance provider, despite the management consultants work, and the business may not succeed in their application. The business in question could make a legal claim against the consultant, claiming that the consultant has failed to deliver the accounts in a way that would guarantee funding.

Old Projects Arising Again

Just because a contract is finished does not mean that a management consultants liability ends. Liability for work carried out can last for at least six years after the work has been completed. For example, going back to the situation that we mentioned above, the management consultant that carried out the financial work for the above company, if any issues were to arise two years after this work had been completed, the management consultant would still be liable.

How To Protect Your Business?

Although these examples may scare you slightly, there is fortunately some relatively simple precautions that management consultants can take to help protect themselves against damaging claims:

Check Your Contract

Every time you start a new contract, ensure that you have a well-drafted contract between yourself and your client. This should help protect you against any future difficulties as your terms and conditions will cover areas such as payment terms, areas of responsibility, objectives and mediation procedures in the event of a problem.

Make Clear Your Responsibilities

At the outset of each contract, define clear objectives and responsibilities to avoid you acquiring additional tasks that were outside your remit. If you are happy to take on additional work, make sure that your contract and agreement with your client reflects the new responsibilities.

Keep Comprehensive Records

Keeping comprehensive written records is an extremely important task as this will assist you if a claim is made against you in the future. With each action, explain clearly your reasons for taking that particular course of action.

Do You Have Professional Indemnity Cover?

Professional indemnity insurance is an important type of business insurance, especially for businesses that give advice or provide a professional service to clients. It can cover compensation claims if a business is sued by a client for making a mistake that leads to financial loss.

As a management consultant, ensure that you have professional indemnity cover in place specific to the consultancy sector. Furthermore, check that the level of indemnity stated on your policy is sufficient to cover the cost of a claim made against you. If the cover is too high, you’ll be paying for a bigger policy than you need, however, to low and you will not be adequately covered in the event of a claim. Also, ensure that your policy is clear about what is covered and what is excluded.

It is worth bearing in mind that even if you cease trading as a management consultant, you should make sure that your professional indemnity cover is still in place for an appropriate period to protect you in the event of a claim being made against you after you cease trading.

If you have any questions in regards to how professional indemnity insurance may be able to help you, or to obtain a quote, please contact a member of our team.