If I have insurance, why do I need a service contract?

As an attorney for service providers, most of whom are professionals, I often get asked about insurance coverage.  I hear this one a lot: “If I have professional liability insurance, why do I need a contract with my clients?”  Frankly, that’s like asking “If I have cheese, why do I need wine?”  Even though each are good alone, they are so much better together!

What is Insurance?

Insurance is a contractual relationship with a company wherein they agree to protect you from certain losses.  The contract, or policy, sets out in detailed language what losses they will and will not cover.  For professionals, there is a type of insurance called professional liability insurance (commonly referred to as errors and omissions or E&O insurance).  This type of insurance protects professional service providers from claims of inadequate service or negligence.

This is basic stuff for us professionals, right?  But bear with me for a moment.  You’ll see where I’m going.

What does having Insurance do?

If a client were to sue a provider for inadequate service, the insurance company (depending on the policy language) would defend the provider in court.  If the defense of the provider is unsuccessful, then the insurance company (depending on the policy language) would pay the determined amount of damages to the client.  Hopefully, though, the insurance company’s defense would be successful in court and no damages would be paid.

As the provider, you think that’s right.  You have paid the premiums for the policy and the above situation is exactly how things should work.  That’s why you have insurance in the first place.  Let them handle it.

Insurance Shortfall

But there’s two things wrong with this attitude.  First, you have a responsibility to avoid lawsuits in the first place. Not only can it damage your reputation just by having them filed, but your insurance carrier is going to assess the level of professionalism you have based on the number of complaints.  If you have several complaints, your insurance company is going to (very likely) think you are a greater risk and increase the amount of premiums you pay.

Second, if your defense of the claim fails in court, the insurance company (likely) has to pay a large amount of money.  Again, this is going to cause your insurance carrier to consider you as a high risk and will (normally) increase the amount of premiums you pay.

So let’s recap:

  1. Damaged reputation by having complaints filed.
  2. Increased premiums for insurance coverage.

What can I do to protect myself and my business?

Insurance alone isn’t the solution.  You have an obligation (and a motivation) to do what you can on your end to avoid having complaints filed.  How can you do this?  By having a really good (written!) client agreement that (1) clearly defines your services, (2) outlines your responsibilities (3) lists situations you are NOT responsible for, (3) limits your liability if something goes wrong (not all professionals can do this, it depends on your industry regulations – but if you are allowed to, do it!), and (4) establishes honesty and trust in your client relationship right from the beginning (more on that in other blog posts).

Think about having that type of contract.  Your clients would know what to expect of you, know what they themselves are responsible for, have a clear understanding of how your relationship is going to work, have a “feel good” attitude about working with you right from the start, and should something go wrong it would (could) limit the amount of exposure you have.  All good things, right?

Now apply that to the client complaint situation we went over above.  Do you think that having such a (written!) client agreement would reduce the amount of people that file complaints? Probably.  But it wouldn’t eliminate all the crazy, unrealistic people (who you hopefully avoid working with in the first place).

But let’s say that a complaint does get filed, now your insurance company steps in.  They look at the contract your client signed and see that it has all those provisions that can help defend you in court.  Do you think that having such a (written!) client agreement would increase your chances of successfully defending the claim?  Do you think it would be easier for a court to see exactly what you were supposed to be responsible for (and what you weren’t)?  Most likely.  Unless you really did mess up and then (if applicable) your limitations of liability provision would reduce the damage (and the amount your insurance company has to pay, which should keep your premiums from sky-rocketing).

Insurance is good to have, but you shouldn’t rely on it completely.  Insurance should only be one part of your overall protection strategy.  Having specific contract terms in your client agreements can help a great deal.  Not only can it reinforce good relationships with your clients, it can help defend and protect you in those situations that don’t go so well.  It makes sense to have as many protections in place as you can, so consider the two-pronged approach of insurance + client agreement.

ABOUT ELEVATE:

At Elevate, we maintain an outlook of optimism while being realistic in protecting against what could go wrong.  We believe in promoting great relationships between our clients and their clients – and we do that by creating service contracts they can use to demonstrate honesty and build trust.

Why Can’t I Fire My Vendor?

This can be a daunting task. Especially for service professionals who have a lot of education under their belts, it may seem frustrating to not be able to do a simple action. Why can’t I fire my vendor?

You no longer like your bookkeeper. You are dissatisfied with your marketing company. You are ticked off at your landlord. You are wanting to try a new accountant.

So you go to fire your current vendor by terminating their contract and find out there’s some complications. This happens often. Why is this so hard to do?

As service companies, we need to hire others to provide us with services. I’m going to call them all “vendors” because they are selling us a service and we are their client. There are all types of services that we need depending on our business. I’m going to divide them into two categories: ongoing services and one-time services.

Ongoing service vendors are those who provide you services on a regular basis and you have an arrangement with them for a period of time – it could be a year or even more. You may make payments to them over time (monthly is common) or you may have made a one-time payment for the entire period. Either way, these are the vendors who do things for you over and over again. Examples are bookkeepers, marketing companies, website hosting companies, IT services, document shredding companies, commercial cleaning companies, business consultants, human resources advisors and so on.

One-time service vendors are those you hire for a project that has a beginning and an end. You define the project, what they are going to provide to you, the time period involved and the payment to be made. Examples are photographers, graphic designers, interior designers, valuation experts, staffing companies and movers. Some vendors can go in either category depending on the relationship, like attorneys, accountants and website developers – these can have ongoing services or just a one-time service.

Relationships with both categories of vendors are important but they are defined differently. You should have a contract with every vendor no matter the type. The contract will define your relationship – and how you can end it. It also sets out what they are supposed to provide to you (in as much detail as possible) and what you are to pay in exchange (and when).

For this article, I’m going to mostly deal with on-going service vendor issues. For one-time service vendors, if you have a problem with them, you just don’t hire them again. No need to fire them. If a one-time service vendor has a bigger project that spans a longer period of time, then the discussion below applies.

For on-going service vendor issues, there are some obstacles in defining the relationship, i.e. negotiating the contract. Here are just a few:

1. Since the services are ongoing, it’s hard to predict what services will be needed far out into the future – that may be weeks, months or sometimes years. That means the services may be hard to define in a contract. Since defining the services is a critical part of determining whether the vendor is performing well enough, that can become a major problem. No benchmark, no way to measure can mean no way to fire them.

2. Sometimes payment is spread out over time but the majority of the services are delivered in the first part of the term. For instance, the development of a website is heavy work in the beginning. After it’s created there would just be upkeep, troubleshooting and maintenance. But you may be paying a set monthly fee over a period of time. That means that sometimes you’re paying for services already rendered. If you want to cancel the service, your payments may be accelerated to pay for the services already done. That creates a big cost to cancel.

3. Often there are auto-renewal clauses in ongoing service contracts that require you to terminate the contract during a specific period of time. If you don’t catch it during that period, you’ve signed up for a new term. For example, a yearly contract could have an auto-renewal provision that says the contract renews for another year unless you notify them sixty days prior to the end of the year. If you aren’t keeping track, you lose the window to cancel without penalty.

4. If you terminate the ongoing services before the completion of a particular project, sometimes you don’t get ownership of what had been created to date. In other words, to get ownership of the project (creation) you have to let the vendor finish the contract. This is more common in creative services, but it can depend on the terms of the contract. Just because you’re hiring someone to create for you doesn’t mean you own the creation. Be careful of intellectual property right issues.

There are many more issues when it comes to defining the relationship with an ongoing service provider, but you get the point. The contract defines it all – everything. Even your ability to fire them if you don’t like what they are providing to you. So while you may be excited to get started, be careful to take the time to read how your relationship is going to work – and you’ll find that in the contract.

If you sign it without taking it seriously, it’s too late. You can’t go back and rewrite the relationship once a problem arises. If you’re on great terms and you both agree, you can rewrite your relationship as many times as you want to. But once you disagree, it’s impossible and you’re stuck with the relationship you signed.

Don’t fall into the trap of thinking that the contract is “just a technically” – it’s more than that. It’s your relationship. And if you don’t feel comfortable with what the contract says, you can always ask them to add or change some language so that you are willing to enter into the relationship. If you’re not sure whether or not you’re comfortable, talk to an attorney and ask them to explain the terms to you. A good business attorney can help you create a good business relationship with that contract – before you sign.

ABOUT ELEVATE:
Elevate Business Law helps small professional service firms with their business relationships (contracts!). Whether it’s relationships between business partners, relationships with clients, relationships with workers, or relationships with vendors, we help you increase the best chances of a successful relationship through well-defined and straight-forward contracts.

Confessions of a Serial Planner

In January, many of us get out our pencils and start thinking.  We begin sketching out a plan for the new year ahead of us.  We make lists of all the things we want to do and accomplish in our businesses.  As professional service providers, we go beyond the simple personal plans (like lose weight, exercise more, eat better).

 

Oh yes, we get complicated and sophisticated with goals like: triple our revenues, double our number of employees, create more efficient processes, expand our marketing efforts, improve our presence in the community, etc.   We color code our to-do lists, arrange sticky-notes on our walls, decide which goals to tackle in which quarter of the year, and put deadlines in our monthly calendars for the next twelve months.  You do all this too, right?

 

Before we go any further, I have a confession to make.  I’m a planner. I can’t help it. I do it without even realizing I’m doing it.  As Lady Gaga puts it, I was “born this way”.  (Cue the Little Mermaid who in my mind sings: I have calendars and journals aplenty. I’ve got reminders and lists galore.  You want post-it notes?  I got twenty (colors).  But who cares? No big deal. I want more!)

 

All jokes and songs aside, I do understand that not everyone is like me. Not everyone has an extensive process, but most of us do make plans for our small service companies.  January is a good time to do it – we’ve got the numbers from the previous year and it feels like a fresh start.

 

Whatever your process is, I’d like to offer a few suggestions.  After all, being a natural planner helps me be the lawyer I am – the one who is looking into the future to see what needs to be done now, the one who prepares for a business deal that’s in the pipeline, the one who lays the groundwork for an upcoming change.  You can see how being a good planner helps me to be a good lawyer.

 

I’ve also studied good business people and have found that all the successful ones make plans.  They diligently plan their year, their quarter, their month, their week and their day.  Our business book club has read countless stories about the planning techniques of successful business owners.  So even if you are not a natural planner like me, chances are you force yourself to plan because you want to be successful.

 

So, for all you planners and non-planners out there, I want you to consider the infrastructure of your business.  As you plan for your growth in the coming year, I want you to consider whether your current business has the legal foundation to support the weight of that growth.  And then I want you to consider adding some infrastructure projects to your goals for the upcoming year.

 

What do I mean by this?  All small service companies (unless you’re a franchisee) are built on the fly.  You build as you go – you figure it out as you grow.  But some things may never cross your mind (or don’t cross them often) because they aren’t that sexy – they don’t grab your attention.  They may seem complicated and they are definitely boring (or so I hear), so they often get sent to the backseat of a car driven by sales and marketing (the more attention-demanding aspects of our businesses).  But I submit to you that these seemingly-complicated and boring aspects of your business are essential to your success.

 

They are the backbone of your legal structure.  They are the foundation that will support your growth.  They can prevent the whole thing from coming crashing down. They are good for you… like vegetables.

 

I have developed a map of what your legal infrastructure looks like – so you can see the places to put some attention and perhaps some improvements.  As a small service company, you may consider adding one or two of these when you’re making growth plans for next year:

Each of the blue circles represent an area of your business where the law can help you set up better protections.  You follow and use the rules available, the law can help you keep your business stable and growing.  As you grow and have more moving pieces in your business, these items support you and give you a framework. 

 

If you ignore the law and charge ahead blindly, you should expect to face a situation at some point where the law will not be all that helpful.  In fact, it can be downright harmful to your plans – which is frustrating and often expensive.

 

So perhaps you’ll consider that it is worth the time and effort to build some better infrastructure in your business this year.  Perhaps you’ll choose to improve your service agreement with your clients, or perhaps you’ll choose to improve some of your employment practices, or perhaps you’ll file a federal trademark for your logo – whatever you choose, the important thing is that you are including it in your plan. 

 

Don’t think you need to focus on everything at once, just choose the most important one first and calendar it.  Make a decision to get it done. Then you can move on to the next one.  After a while, you’ll realize that your infrastructure is holding the weight of the successful business you are building.  Mission accomplished!

 

ABOUT ELEVATE BUSINESS LAW:

 

We help small service companies plan for their growth by establishing legal infrastructure in their businesses.  We conduct reviews of existing infrastructure and help our clients plan for implementing more infrastructure to create a stronger foundation.