Many freelancers, i.e. self-employed people, provide services or sell goods without knowing their liability to customers is unlimited. Most freelancers don’t know the meaning of unlimited liability and don’t know that if things go wrong, they may lose all their property.

Reading further you will discover:

• What is unlimited liability meaning?
• How to manage risks and cap freelancer’s liability by: (1) Insuring a freelancer’s business liability; (2) Entering into a contract; (3) Setting up a limited liability company.

What does unlimited liability mean?

Unlimited liability refers to the full legal responsibility that freelancers assume for all their business debts. This means that liability is not capped, and obligations can be paid through the seizure and sale of owners’ personal assets.

A freelancer must compensate all losses to his or her customers incurred by them because of a freelancer’s willful misconduct or negligence. Being liable without any limits, a freelancer must compensate two for types of damage:

1. Direct damages. This sort of damage includes the amount of the loss or damage of property sustained by a person and the expenses incurred as direct consequences of an infringement of a contract.
2. Indirect damages or consequential damages. It means incomes the injured person would have received if unlawful actions had not been committed.

In addition to the direct damages and the incomes of which a creditor has been deprived, damages shall comprise the following:

1. Reasonable costs to prevent or mitigate damage;
2. Reasonable costs incurred in assessing civil liability and damage;
3. Reasonable costs incurred in the process of recovering damages within an extrajudicial procedure.

For example:

Let’s say you are a photographer and a web designer. A client has commissioned you to create marketing materials. You did it. Two weeks later, you receive an email from the client informing you that your client has received a notice from Apple Inc. The notice states that the marketing materials you created infringed Apple’s intellectual property rights. You mistakenly used several logos and slogans copyrighted by Apple Inc. As a result, your client must discontinue the marketing campaign. His damages amount to USD 1,000,000. Your liability is unlimited. You must therefore fully compensate for all losses. If you are not a multimillionaire, such an amount could be devastating.

How to manage risks and cap freelancer’s unlimited liability

To protect yourself and your family, you should do as follows:

1. Insure your business liability.
2. Enter into a good written agreement before providing services or selling goods.
3. Set up a limited liability company.

#1. Insurance of freelancer’s business liability

A freelancer’s liability may be insured.

General liability insurance

General liability insurance protects against common accidents, such as property damage or injuries involving a third party. For example, a web designer accidentally dropped his client’s tablet during a presentation. In this event, an insurance company will pay for the repair or replacement of the damaged tablet.

Professional liability insurance

Professional liability insurance protects against lawsuits and claims related to professional services. This type of insurance is a must for many freelancers. If the photographer and web designer had professional liability insurance, the damage would have been covered by the insurance company.

Other types of business insurance

The aforementioned insurances are the most common ones. However, depending on what you do, there are many other policies you may want to think about as well: life insurance; rideshare insurance; intellectual property insurance; etc.

However, note that if the insurance benefit is insufficient to cover the total amount of the damage, the difference between the amount of the insurance benefit and the actual amount of the damage is the responsibility of the freelancer who is liable for the damage caused. For this reason, insurance is a good solution, but not a 100% guarantee against all problems.

#2. Contract terms limiting freelancer’s unlimited liability

A contract (an agreement, terms and conditions, etc.) is a document outlining the terms of the cooperation between a freelancer and a customer. In theory, a contract may be expressed either in oral or written form. However, it is strongly recommended to conclude only written agreements.

In the event of a dispute between a freelancer and a customer, a written contract is an effective means of protecting the freelancer’s rights and interests. It is difficult to prove the existence of certain conditions if the agreement was made orally. It is your words against the other party’s words unless there is circumstantial written evidence (e.g. emails, invoices, etc.) or other persons can testify and confirm your words.

Written contracts can be drawn up and signed as follows:

• A printed document. To sign such a contract, the parties must meet each other in person, print out a document and put their wet signatures on this document.
• A printed and scanned/photographed document. A party prints out a document and signs it, then scans/photographs/etc., attaches it to an email and sends it to the other party. The latter prints it out, signs it, scans it and emails it back.
• An electronic contract signed with electronic or digital signatures.

To limit a freelancer’s commercial liability, the following clauses must be included in all contracts:

#1. The clause setting the maximum amount of a freelancer’s liability:

The Freelancer’s total aggregate liability in contract, tort (including negligence and breach of statutory duty howsoever arising), misrepresentation (whether innocent or negligent), restitution or otherwise, arising in connection with the performance or contemplated performance of this Agreement or any collateral contract shall in all circumstances be limited to the amount paid by the Customer hereunder in the six (6) months immediately preceding the event giving rise to such claim. 

#2. The clause establishing liability only for direct damages:

In no event and under no legal theory, whether in tort (including negligence), contract, or otherwise, unless required by applicable law (such as deliberate and grossly negligent acts) or agreed to in writing, shall the Freelancer be liable to the Customer for indirect, special, incidental, or consequential damages of any character arising as a result of this Agreement or out of the use or inability to use the Services and/or the results of the Services, even if the Customer has been advised of the possibility of such damages.

#3. Setting up a limited liability company

The best way to protect yourself and limit your liability is to set up a limited liability company. By incorporating a company, you will draw a clear line between your personal life and your business life:

Service provision or goods sale-purchase contracts will be made between your company and a customer. If something goes wrong, you can lose only property that is owned by your company but not by you. It’s painful to lose your company, but it’s not deadly. You will have a second and even a third chance to try again.

You can register a company by applying to a special governmental body.

For example, if you live in the United Kingdom, you should apply to the Companies House. If you don’t have enough time to do that by yourself, hire an intermediary, e.g., a solicitor or a company specializing in company incorporation, who/which help you to do that.

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^{Images from Pixabay.}