As a business professional, you are responsible for the advice and services you provide to clients. Clients who believe they have been financially harmed by your advice can bring a legal claim against you and your firm. Under these circumstances, errors and omissions insurance can help protect you against legal claims of inadequate work or negligence.
What is errors and omissions (E&O) insurance?
Errors and omissions insurance – which is a form of professional liability insurance – provides your business, employees and business professionals with coverage against lawsuits for clients' claims of inadequate work or negligent action resulting from your professional services. The businesses' insurance policy will pay your legal fees, court costs and any settlements up to the amount specified in your policy.
General liability insurance
General liability insurance provides coverage against claims that can arise when a third party is injured or property is accidentally damaged on your premises (e.g., a customer trips on the carpet in your store and hurts their arm). It covers damages that an employee causes on the premises of the third party. However, general liability insurance does not provide protection against claims that relate to professional or business practices – this would be covered by either errors and omissions insurance or professional liability insurance.
Who needs errors and omissions insurance?
Any business or professional that provides advice or professional services requires errors and omissions insurance. Some states and licensing boards require some types of businesses to have errors and omissions insurance coverage.
For example, the Financial Industry Regulatory Authority requires professionals such as insurance brokers, insurance dealers, registered investment advisers and financial planners to have this type of insurance.
Other companies and business professionals who provide advice or a service (e.g., writers, real estate agents, accountants, advertising firms) would also benefit from having errors and omissions insurance, which would protect them against claims from clients who suffered financial harm due to the advice or services received.
For example, a client could sue a financial advisor after their investment loses money, even though the advisor explained the risks and they were within the client's established guidelines. Errors and omissions insurance covers the legal fees, which can be high, even if a court finds in favor of the financial advisor.
Healthcare professionals
Healthcare professionals (namely, physicians) require medical malpractice insurance, which is a type of errors and omissions insurance. This insurance provides protection against claims from patients who state they were harmed by the professional's negligence, or due to treatment decisions that were intentionally harmful. The insurance also provides coverage against claims that arise from the death of a patient.
Technology professionals
Traditional liability policies do not always cover pure financial losses that result from the failure of technology. Clients can sue technology providers for losses associated with the products or services that the technology professionals provide. Errors and omissions insurance covers the legal costs involving situations such as the following:
- Software you sell to a client contains errors, causing the client to lose important business or customer data.
- Equipment you install for a client prevents them from receiving online orders for several days.
- The cloud-based data services you provide fail to back up a client's critical data.
- A website you design for a client copies the layout of a competitor's website too closely.
- You miss a deadline for developing a client's technology or application, causing the client to lose potential or actual profits.
Errors and omissions insurance differs from cyber-liability insurance, which protects your business from cyberattacks and data that is accidentally lost or leaked.
What does errors and omissions insurance cover?
Errors and omissions insurance provides coverage for these types of claims:
- Negligence
- Errors in services provided
- Omissions
- Misrepresentation
- Violation of good faith and fair dealing
- Inaccurate advice
- Work mistakes and oversights
- Undelivered services or unfinished work
- Missed deadlines
Errors and omissions insurance covers clients' claims of wrongdoing made during the policy period. Policies are usually arranged on a claims-made basis, wherein insurance coverage applies only to claims that are made during the policy period. A typical errors and omissions insurance policy protects the insured against financial loss that arises from a claim made during the policy period for a covered error, omission or inaccurate advice that takes place in the conduct of the insured's professional business.
Covered costs
Liability claims can be very expensive and could force you to close your business. Legal expenses can be in the thousands of dollars, and being found legally at fault or agreeing to settle out of court may require you to pay a large sum out of pocket. Errors and omissions insurance helps you cover the following expenses:
- Lawyer fees
- Court costs
- Administrative costs
- Settlements and judgments
Temporary staff and independent contractors
Errors and omissions insurance covers your business's permanent employees and, in some cases, temporary staff and independent contractors. (Make sure to check with your insurance provider.) This is important because some businesses rely on temporary employees during busy periods. Other businesses use independent contractors to take on projects as needed. Insurance coverage is necessary for these workers, as they, too, can be negligent or make mistakes and, in turn, cause clients to sue your business.
Omissions
Omissions involve the failure to perform a task, or the failure to provide information, that would result in the client's loss of money. Here are some examples of omissions:
- Failure to perform a background check
- Failure to identify a property's commercial use, which would disqualify the client from insurance coverage after a fire
- Failure to get consent
- Failure to warn of a limitation period
- Failure to provide notification
Professional negligence
When a client hires you for your specialized skills or experience, you must meet a higher duty or standard of care. You could be held liable for professional negligence if a client experiences physical or financial harm because you did not abide by this higher standard. As a professional, you must meet a higher duty or standard of care than a person without these skills and knowledge. Here are some examples of professional negligence:
- An accountant fails to file a client's tax return on time.
- An engineer causes a project to be delayed or incur higher costs than planned.
- An insurance professional misrepresents the type or amount of insurance coverage provided in a plan.
- A real estate agent fails to notify a buyer of a defect in the home.
Misrepresentation
Misrepresentation is when the professional makes a false statement of a material fact that affects the client's decision when agreeing to a contract. If the client discovers the misrepresentation, the contract can be declared void and the client can seek damages. For example, a business consultant could be charged with misrepresenting themselves to a client by stating they have experience in an industry when, in reality, they do not.
There are three types of misrepresentation:
- Innocent misrepresentation occurs when the person making a false statement of material fact was not aware that the statement was untrue.
- Negligent misrepresentation occurs when the person who made the statement did not try to verify the statement was true before executing a contract.
- Fraudulent misrepresentation occurs when the person knew the statement was false when they made the statement, or they recklessly made the statement to get the other person to enter a contract.
Exclusions
Errors and omissions insurance does not cover the following:
- Illegal acts
- Purposeful wrongdoing
- Bodily injury to employees or customers (these types of claims are covered by a general liability insurance policy)
- Property damage (these types of claims are covered by a general liability insurance policy)
- Work-related injuries or illnesses (these types of claims are covered by a workers' compensation insurance policy)
- Discrimination or harassment
Even if you have insurance, claims made in some jurisdictions might not be covered. Check your coverage limits with your insurance provider.
Claims period
Errors and omissions insurance covers the following circumstances:
- The claim is filed within your policy period or the extended reporting period.
- The incident occurred on or after the retroactive date (i.e., incidents that occur on or after a certain date in your policy are covered).
Most insurance policies do not cover claims that arise from work done before the policy was put into force.
How much does errors and omissions insurance cost?
Several factors can affect the cost of your professional liability insurance:
- Coverage limits: Higher coverage limits expose the insurance company to more expensive lawsuits, so the costs of the insurance premiums also increase.
- Type of business or business risk: Some types of businesses (e.g., lawyers, doctors) have higher risks and thus incur more lawsuits than other industries, so they pay higher professional liability insurance premiums.
- Location: The top insurance providers price errors and omissions insurance according to state insurance regulations and typical loss exposures in those states.
- Claim history: If a business or product has a history of claims, it will lead to a higher risk of potential lawsuits for the insurance provider, thus increasing the costs of the errors and omissions insurance. [Read more about product liability insurance.]
When getting quotes for errors and omissions insurance, show what you have done to maintain your professionalism, expertise and knowledge of your business. Take the following steps to help reduce your insurance costs:
- Provide your employees with training and education.
- Perform quality control on your contracting system.
- Stay in touch with customers to make sure they are satisfied with your services and advice.
Errors and omissions insurance can protect your business from the immense costs associated with lawsuits. Protect yourself and your employees by securing errors and omissions insurance coverage.