Common professional indemnity risks for management consultants (and how to help protect your business)

Posted by Jim on November 03, 2015  /   Posted in Blog

October 15, 2015 Hiscox

Management and business consultants are often expected to work miracles. Whether it’s turning around a failing business or transforming the operations of an inefficient organisation, there can often be unrealistic expectations. The consequences of failure (or even perceived failure) can be costly. Businesses are increasingly inclined to sue their advisors, potentially resulting in costly legal fees for their consultant regardless of whether they have been negligent or not.

It’s why professional indemnity insurance and good risk management are important considerations for every consultant. Here we take a look at some areas that can lead to legal claims against management consultants:

Failure to perform

Measuring success or failure can be a subjective exercise. Take one example of a management consultant brought in to help get a business’s accounts into the sort of shape that would be acceptable to present to a bank in an application for fresh finance. The consultant came in, sorted the accounts and finished their contract. Unfortunately, the accounts were still questioned by the bank in the subsequent application and the business failed to get its finance. The result was a legal claim against the consultant by the business, who claimed the consultant had failed to deliver the accounts in a way that would guarantee bank funding.

Management consultants are often employed to turnaround failing businesses. Even if they achieve their set goals of making the business more efficient, but the business fails anyway, they can find themselves being sued  to recover losses.

Projects coming back to haunt you

Finishing a contract does not necessarily mean an end to a management consultant’s legal liability either. In fact, liability lasts for at least six years after the work is carried out. One claims example we have dealt with saw a management consultant brought in to help turn around a care home which had been on the end of some damning criticism from the Care Quality Commission. The consultant duly made the necessary changes to ensure the home was CQC compliant. Unfortunately, there was a drop-off in the number of residents at the home because of the bad publicity created by the original CQC findings. When the care home owners came to sell-up some years  later they were unable to get the price they wanted and blamed the management consultant; claiming a six figure sum even though it related to work carried out years before.

We successfully defended our client against the claim, but had they allowed their professional indemnity cover to lapse  they would have had to fund their legal costs themselves.

Loss of fees

A consequence of a claim can also be loss of fees for the project under dispute. A management consultant undertook consultancy work for an NHS trust, with the aim of devising a strategy to achieve significant savings. The work involved three phases and the claimant in this case, the NHS trust, implied that the first phase of the work was undertaken negligently by the consultant resulting in a three-month delay with the project, so cost savings were not implemented until later. Not only was the consultant facing a claim but also the loss of fees worth hundreds of thousands, which they could not afford to write off.

Protecting your business

Fortunately, there are some relatively simple precautions that management consultants can take to help to protect themselves from damaging claims:

Ensure you have a clear contract

When starting a new contract, having a well-drafted contract between you and your client should help ensure there are no future difficulties. It’s worth taking legal advice to check your standard terms and conditions  will cover  areas such as payment terms, areas of responsibility, objectives, and mediation procedures in the event of a problem.

Avoid mission creep

Having clear objectives at the outset can avoid you acquiring additional tasks and responsibilities that were outside of your original contract. If you’re happy to take on the additional work, make sure your contract and agreement with the client reflects the new responsibilities.

Keep comprehensive records

You need to be very clear about why you have chosen a particular course of action. Keeping comprehensive written records is an important task, and will assist should a claim be made in future.

Check your professional indemnity cover

Most management consultants will have professional indemnity cover but there can be a great deal of difference between a general policy and one designed specifically for the management consultancy sector. Is the level of indemnity – or the amount the policy will pay out in the event of a claim – sufficient? Too high and you’ll be paying for a bigger policy than you need. Too low and you won’t be adequately covered in the event of a claim. Is the policy clear about what it covers and what it excludes?

Finally, even if you cease trading as a management consultant, you should ensure your professional indemnity cover is maintained for an appropriate period to protect you in the event of a claim being made against you after you cease trading.

Written by David Owen

David Owen is a solicitor and claims underwriter specialising in Professional Indemnity,…

About Jim

James is a director with JCR Network Services Ltd, which provides sales, marketing and business development expertise to local SMEs in Ireland and the UK. Many businesses have developed their growth strategies through our focussed actions. We specialise in helping the agri-food , emerging technology, manufacturing and services sectors.

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