I've been doing freelance work for more than 10 years without liability insurance (the specific type you're thinking of is called "errors and omissions") and never had a problem. In talking with other freelancers, the subject sometimes comes up but I've never heard of a copy editor actually getting in hot water over missing a typo.
One former freelancer said he always added this to his work contracts and never had a problem:
Quote:
Liability
The documents, online information structures, or reports I provide you are based on my best understanding of information you provide, as supplemented by my own general knowledge. It is your responsibility to examine them and to determine their accuracy and their suitability for whatever purposes you put them to. You agree that I am in no way responsible for any errors or omissions in any work I do for you or
for any harm of any kind that comes to you, your customers and clients, or anyone else as a result of using or relying on my work in any way.
That makes clear what should be clear: That the ad agency, not the contractor, is responsible for the final product.
If you do a lot of freelance work it's probably worthwhile to get some general business insurance, with E&O a part of it.
As for withholding payment, that's a no-no. If you do the work and they're sufficiently satisfied with it that they take it to the printer, they have to pay you.