Errors and Omissions
What is E&O insurance?
E&O insurance is a form of professional liability insurance that safeguards professionals, employees, and businesses from claims of unsatisfactory work or careless actions.
Imagine the following scenario. A couple orders a cake from a bakery. The head chef takes on the challenges and begins working. After rigorous research and numerous trial and errors, they figure out how to make the cake according to the given specifications without making it fall apart. However, they put in a different flavor by mistake. Despite the excellent design, the couple sues the bakery for neglecting the requested flavor.
Your company can also face similar lawsuits if one of the employees makes a mistake due to negligence. While the bakery is at fault in the scenario mentioned above, lawsuits can also arise even when you’re not at fault. Moreover, defense against such claims can cost you thousands of dollars.
Thus, in cases like these, an E&O insurance policy can reimburse you for lawyer fees, court costs, and settlements up to the limit specified in the insurance contract. Nevertheless, even if the court rules in your favor, the legal fees can still be very costly.
Different businesses assert E and O insurance differently. IT and real estate niches know it as E&O itself. On the other hand, consulting, accounting, and architecture firms call it professional liability insurance. Likewise, legal and medical businesses describe it as malpractice insurance.
Whichever professional industry you work in, you are vulnerable to the following claims:
- Late delivery
- Incomplete work
- Contract breach
Who needs errors & omissions insurance?
E&O coverage is essential for professionals whose work can be questionable by the client for being negligent, late, or inadequate. For example, an electrician may face a lawsuit if the customer finds a defect in their newly installed lights.
Similarly, not only full-time workers, but contractual professionals are also exposed to E&O lawsuits. For instance, assume that you’re hired as a marketing consultant to help generate leads for a startup business. If the tactics you apply aren’t sufficient to sustain the company, the owner may attempt to blame you and file a case.
Regardless of how genuine the claims mentioned above are, they can feed off a significant chunk from your cash reserves. However, you can prepare for such losses before by getting an E&O coverage.
Most companies have a false sense of security, thinking that a business owners policy will cover legal defense fees. A BOP does not protect you against costs adhering to lawsuits.
The following types of professions and professionals are the most vulnerable to E&O claims:
- Finance professionals & institutions
- Marketing & advertising agencies
- Doctors & other medical professionals
- Insurance agents or brokers
- Law firms & attorneys
- Real estate agents
- Architects, engineers, and their respective firms
- Registered investment advisers
Errors and omissions insurance coverages
E&O insurance provides coverage for the following claims:
- Court costs: Businesses can face claims for their negligent actions, late delivery, errors, or even professional recommendations. Whatever leads to a lawsuit, can significantly derive finances, and also dampen your organizational image. Keep in mind that people may sue you even when you’re not guilty, thus raising unnecessary court costs.
Companies of all sizes-small, medium, and big- are susceptible to legal claims. Thus, having a coverage that compensates costs arising from legal hassles can protect your company, your employees, and your sub-contractors too.
- Acts of negligence: E&O insurance indemnifies you for claims pertaining to acts of negligence. Negligence shows when a business presents careless work to their client. Exceeding deadlines, having errors, withholding information, or wrongful consultation are considered acts of negligence. When someone suffers a loss due to an organization’s negligent actions, they have the legal right to seek reparations.
Claims of negligent acts may arise whether you’re at fault or not. So, it is best to have a contingency plan- e&o insurance, to assert such claims as they come.
- Contractors and temporary workforce: Hiring contractors and temporary workforce make operations easier for businesses. In a competitive environment, companies form alliances to help each other grow. However, you need to remember that any error made by the hired can reflect on you. Consequently, the client may sue you.
Nevertheless, it doesn’t make sense to stop hiring workers and contractors out of the fear of getting sued. What you can do instead is get insured from a reputable insurance company. That way, you can grow your business and your alliances without the fear of a lawsuit.
- Lawsuit for services provided in the past: Clients can sue businesses long after they’ve provided services. What makes this scenario complicated is that the claim may be arising from a service provided even before the insurance contract was signed. Furthermore, the majority of the insurance carriers only compensate for claims after the policy is approved.
Hence, waiting for a lawsuit before purchasing a policy can backfire. Getting insurance and securing yourself beforehand is the wiser choice.
- Damages: You may have to compensate people for financial and non-financial losses such as emotional distress, suffering, and pain.
Lawsuits about damages are versatile, and any business can fall victim to them. A cloud-hosting company can get sued in case of a data breach. The Guardian reported that Facebook was fined $5bn for data breach. Similarly, a supplier can get sued for misplacing shipment.
Simply getting insured will not save you from all the risks. But if you consult with multiple agencies, you might just find a policy that best fits your business.
- Defamation: Acts of defamation, such as libel and slander, can hamper a company’s brand and deplete their finances. Libel refers to making a false claim writing, and slander refers to making one orally. If someone sues you for defamation justly, or unjustly, you will have to bear legal expenses.
BBC reported that a diver filed a case against Tesla co-founder Elon Musk for defamation, demanding $190m in compensation.
E&O coverage can indemnify you for claims arising from defamation. Nevertheless, you should choose your words wisely when communicating with your employees and clients.
- Copyright claims: When someone uses other’s work without their consent, then copyright claims can arise. Whether you’re at fault intentionally or unintentionally, having insurance can save you substantial costs in advance.
The New York Times reported that Oracle demanded $9 billion from Google for wrongfully copying its codes.
The businesses most vulnerable to copyright claims are those working in the advertising and media industry. The designs, slogans, logos, and other marketing elements they create have a high probability of coinciding with those of competitors.
Common exclusions of errors and omissions insurance
The exclusions of errors and omissions insurance policy may vary across different insurance carriers. While a carrier may exclude some policies, others may not. You can find out the exclusions when getting an insurance quote. Nevertheless, here are some of the common exclusions of E&O insurance:
- Pollution: An E&O policy will not reimburse you for pollution related claims.
- Workplace discrimination: An employment practices liability insurance will cover for claims arising from workplace discrimination, not E&O insurance.
- Bodily harm: E&O insurance does not cover lawsuits stemming from bodily harm.
- Illegal or criminal activities: No insurance policy can cover you for claims that surface from illegal or criminal activities.
- Theft: An E&O coverage won’t cover you in case of theft.
The following risks are excluded by some carriers, and included by others. You need to check with the carriers before purchasing an E&O policy to see if they cover these or not:
- Copyright claims
What factors determine errors and omissions insurance cost?
The following factors determine the E&O insurance cost:
- Insurance carriers: As mentioned above, the policies that the carriers provide differ from one another. Thus, the insurance providers charge premiums according to the number of risks covered.
- Industry: The industry you work in also hugely impacts your premium rates. As mentioned before, if you work in the advertising and media industry, then you have higher risks and, thus, higher prices.
- Location: The location you operate in also influences the insurance cost. For example, a digital marketing firm in a suburb will have lower premium rates than that of one situated in a city.
- Claims history: If history shows that you’ve had a lot of lawsuits filed against you, your premium will be higher. It is because you are more likely to face claims than someone who has been sued fewer times than you.
FAQs on E&O insurance policy
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?
Is a surety bond the same as errors and omissions insurance?
As we’ve discussed, an E&O insurance protects the insureds from professional errors or mistakes. On the other hand, a surety bond is a contract signed between 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.
Does general liability cover errors and omissions insurance?
A general liability insurance does not compensate for professional negligence. It covers you for claims related to bodily injury, property damage, and advertising injuries.