Errors and Omissions Insurance
Your Contingency Plan
You can’t stop working for fear of making errors that may lead to losses of thousands or even millions of dollars. But that doesn’t mean you have to be burdened by the possibility of expensive lawsuits resulting from any errors you make at work. Errors and Omissions insurance (E&O insurance) has got your back. It covers your litigation costs when you fall short in your professional conduct.
In this article
- What Is Errors and Omissions Insurance?
- Why Errors and Omissions Insurance?
- What Does Errors and Omissions Insurance Cover?
- Does Errors and Omissions Insurance Cover for Every Action?
- Do You Need E&O Insurance?
- Types of Insurance With Errors and Omissions Coverages
- Handy Tips for Policy Discounts
- Other factors that affect your insurance cost
What Is Errors and Omissions Insurance?
E&O insurance falls under professional liability insurance, meaning it caters to the needs of businesses, employees, and other professionals. E&O insurance protects the insured (someone who is covered by insurance) from lawsuits arising from errors, omissions, misrepresentation, inaccurate advice, or other mistakes made in a professional capacity.
Why Errors and Omissions Insurance?
E&O insurance covers defense attorney fees, court costs, administrative, and lawsuit settlement costs. These costs can be pretty expensive for you to manage on your own.
Statista reported that large companies spent 22.75 billion dollars on litigation in 2019. And that’s just what the large companies paid. According to a survey done by the Small Business Administration, the legal costs ranged from $3,000 to $150,000 for small business owners.
Lawsuits need not necessarily arise only when you are at fault. Frivolous lawsuits happen more frequently than you might think. One of the most absurd cases that happened in Washington D.C., in 2005, was reported by CBS News.
Consider this example: An administrative law judge took a pair of his pants for alterations to a local dry cleaner. After a few days, the judge went to the location given by the Chungs (business owners) to collect the pants. However, he couldn’t find the shop there. Chungs had mistakenly given the wrong address, but they immediately fixed the situation, and soon the pants were located. But he claimed that those weren’t his pants and refused to take them.
Later, he sued Chungs for $67 million. Apparently, a sign was displayed at the store that read “satisfaction guaranteed,” but he wasn’t satisfied. Hence, he contended that Chungs had under-delivered their services, and they violated seven sections of the state’s consumer protection law. However, the verdict was in favor of the Chungs, and the judge lost the case. Even though the Chungs didn’t have to pay $67 million, they incurred a large amount of defense costs and relied partially on donations and fundraisers to help them pay. Unfortunately, the Chungs ended up selling two of their three cleaning businesses. E&O insurance compensates for legal expenses if you ever fall victim to a frivolous lawsuit.
What Does Errors and Omissions Insurance Cover?
E&O insurance provides the following coverages:
Negligence is when you fail to show proper care while at work. Some examples of negligence would be missing deadlines, withholding information, wrongful consultation, errors, etc. Your negligence can cost your client a substantial financial or opportunity loss, resulting in lawsuits against you. A suit may be filed against you even when you are not at fault.
Errors and omissions
It could be an error by an accountant during bookkeeping, or a marketer failing to disclose certain information (omission) while running a campaign—E&O insurance covers the legal costs of errors and omissions lawsuits. Meticulously double checking your work is an excellent way of preventing such claims. But when the claims arise, E&O insurance is your savior!
As a professional, you make comments in public, whether it’s in person, on your website, on your social media, or on other media platforms. As such, you may inadvertently hurt the image or reputation of another company or brand. The result can be a lawsuit against you for defaming the other party. E&O insurance indemnifies you in such instances.
Copyright infringement is a phenomenon where someone uses another person’s or company’s work without consent. In 2010, Oracle sued Google for violating the copyright of the application programming interface while developing the Android operating system. The dispute has lasted almost a decade and is still ongoing. According to The New York Times, Oracle demanded $9 billion from Google. E&O insurance protects you during such instances.
Your business may need to hire contractors, marketers, or another type of temporary workforce. Such workers, while working for your business, represent you. Hence, the consequence of any professional negligence or unethical behaviors on their part can fall on you. E&O helps you to transfer such risks to the insurer. However, not every E&O policy covers the actions of a temporary workforce. Therefore, clarify with your insurance agent beforehand.
Bear in mind that your insurance provides coverage up to the policy limit. It compensates no more than what is specified in the insurance contract.
When the lawsuit claims arises, make E&O insurance your savior!
Does Errors and Omissions Insurance Cover for Every Action?
Errors and Omissions insurance covers a multitude of actions leading to lawsuits, but it doesn’t cover all. And it is only fair because else, moral hazards would take a toll. As a result, there are certain exclusions:
- Claims arising out of your illegal or criminal activities
- Workplace discrimination-led claims
- Pollution related claims
- Property damage or third-party bodily injury
- Claims instigated by events that happened before the policy effective date
- Claims due to failure to protect personally identifiable information
Consult with your insurance agent or insurance carrier regarding the exclusions. The reason is that exclusions vary from one carrier to next. For example, some insurers may cover for temporary workforce actions, while some may exclude them.
Do You Need E&O Insurance?
You can add, remove, or modify coverages in your D&O policy through endorsements. Talk to your insurance agent and add endorsements to your policy for better coverages. The common endorsements are:
Physicians in seven states—Kansas, Massachusetts, Rhode Island, New Jersey, Wisconsin, Connecticut, and Colorado—need to obtain professional liability insurance. In those states the minimum coverage requirement per claim can range from $100,000 to $1 million, and per year from $300,000 to $3 million.
Additionally, in some states physicians need to have medical malpractice coverage to participate in state programs designed to help them with claims. Those states are Louisiana, New Mexico, Indiana, Nebraska, Pennsylvania, Wyoming, and New York.
Likewise, before receiving a license, real estate agents in over ten states need proof of E&O coverage. Some of the states that require proof are Idaho, Rhode Island, Iowa, Colorado, Tennessee, and Mississippi. The requirement of E&O insurance differs as per the state-specific regulations.
E&O insurance is not mandatory in all states or for all professions. However, the need depends on your risk exposures and your contingency plans. Consider it an investment because when lawsuits come your way, insurance keeps you from digging deep into your pockets. Although state or federal law may not require an E&O insurance policy, it is best to have one in place.
Types of Insurance With Errors and Omissions Coverages
These insurances may have Errors and Omissions insurance coverages. Talk to your insurance agent and find out.
Handy Tips for Policy Discounts
Various factors affect the cost of the policy. Understanding these factors can be quite helpful in keeping your errors and omissions insurance premium rates affordable.
- Shop for the carriers that provide comparatively more extensive coverage at lower premiums
- Purchase multiple policies from a single carrier
- Pay extra attention while working and keep your claims history minimal. Claim history has a direct relationship to the cost of insurance.
- Implement safety measures and quality control techniques. Risk management efforts are positively rewarded through discounts in the policy.
Other factors that affect your insurance cost:
- Some industries are highly prone to lawsuits, such as the medical field. Higher risks lead to a higher premium.
- The location of your business determines the cost. Is it in a high-risk area or low-risk area?
- If you want comprehensive coverage, the cost will spike.
- The number of employees in your business. The greater the number, the higher the premium.
Is error and omission insurance the same as general liability insurance?
While both these insurances are “liability insurance,” their scopes differ. Errors and omissions insurance covers lawsuits filed by third parties who claim that you were negligent while providing a professional service. As for general liability insurance, it covers lawsuits when your business causes property damage or bodily injury to the third party.
Are there any precautionary steps that I can take to minimize E&O claims?
- Make sure you have a written copy of all contracts, mentioning what work you will complete, what you won’t do, hand how much the fees will be.
- Follow up regularly with updates.
- Create and implement a quality control system.
Do notaries need E&O?
Yes, notaries need E&O insurance. People have sued notaries for negligence, which has, in turn, cost them money.
I need to file an E&O claim. How do I do it?
The first thing that you need to do is reach out to your insurance agent. You will need to provide the necessary details, such as your name, where you work, and the policy number. Then, your agent will guide you through the required processes step-by-step.
Is a surety bond the same as errors and omissions insurance?
E&O insurance protects the insureds from professional errors or mistakes. On the other hand, a surety bond is a contract signed among three or more parties. Its purpose is to make sure that the principle who purchased the bond will fulfill its obligations to the third party.
Not sure where to start? Why not get a quote!
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