The Economy and Insurance: What you Need to Know

Due to Covid-19, the economy is experiencing a major downturn. While the duration or the severity of the contraction is still unclear at this point, businesses need to take action to ensure their survival. The obvious questions focus around generating revenues and managing expenses. However, increased sensitivity to risk management should warrant an equal amount of attention.

During economic downturns professionals are at an increased risk of claims made against them by their clients. This results in increased claims activity on insurer’s portfolios. You may ask yourself “why do claims increase during an economic downturn?”. As businesses or clients are impacted by financial pressures, the likelihood to seek compensation for potential losses increases as does the likelihood to commence frivolous litigation. As their trusted professional, you have a target on your back.

We identify warning signs to look out for and potential actions you can take to protect yourself and your business through our professional liability and E&O experience.

Client Agreements

Engagement letters or contracts with your client are a critical risk management component. They outline the terms agreed to between you and your client. The agreement will define the services you will render, outline the scope and limitations of the engagement, and identify your responsibilities as well as those of the client. It also offers an opportunity to address any misunderstandings prior to the commencement of the engagement.

Be sensitive to the following:

  • Vague definition of the scope of services
  • An amendment to the scope of services by the client
  • Vague payment terms
  • A request to waive executing an agreement
  • A client returning an unsigned agreement

In the event of a professional liability claim, the agreement serves as the first step to defend such litigation. While a formal agreement reviewed by a lawyer is preferable, evidencing and acknowledging the understanding between you and your client is valuable.

Client Selection

There is nothing worse than a bad client. Issues can range from lack of payment to constantly changing demands to threats of litigation. The mental and resource drain of such a client has a spill over effect on the rest of your business. Identify the right client from at the time of engagement and remember the following:

  • Maintain your client selection criteria
  • Take identified red flags seriously
  • Trust your instincts


Strong documentation should be a priority regardless of the state of the economy. However, be particularly sensitive to your documentation standards during this time. Detailed documentation is valuable in resolving potential disagreements or, in the unfortunate event of a claim, provide supporting evidence.

Maintain Your Standards

The state of the economy could impact the financial health of your clients. In fact, it could also impact your own financial situation. A common and often costly mistake is to compromise your service standards. Regardless whether it is self-generated or client induced pressure, do not cut corners or risk delivering a subpar work product. The long-term impact could lead to a lost client or worse a claim made against you for the error or negligence.

Client Not Paying

A client not paying their bills should be taken very seriously and addressed in a time-sensitive manner.

  • Communicate with your client to seek an explanation
  • Send reminders for outstanding invoices
  • Prevent one missed payment turn into two or three
  • Document correspondence as well as the delivery of your work product
  • Potentially suspend delivering your work product
  • Involve a lawyer to collect your fees

Open and transparent communication is critical to identify and potentially resolve the issue. Exhaust all other avenues before suing for your fees. In a worst-case scenario, the client is not paying their fees as they are unhappy with your work. Suing for fees may lead to a counter-suit that may allege negligence and subsequently lead to a claim.

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