What Every Business Should Know About Errors and Omissions Insurance

Posted in Legal Alerts on June 12, 2023

Errors and omissions insurance is another name for professional liability insurance. If your company provides professional services, you could be at risk when a customer is unsatisfied with the services they received from you or your company. Your errors and omissions insurance would protect you against claims of negligence, mistakes, and inadequate work. This is crucial coverage. Otherwise, a single lawsuit could bankrupt your business and force it to close. For that reason, many business owners view E&O insurance as insurance they cannot afford to be without. In fact, companies should err on the side of caution if they are in doubt about whether they need this type of insurance.

Who Needs Errors & Omissions Insurance?

E&O Insurance is a common need for companies that provide services to customers for a fee. In the course of providing those services, an employee may make a mistake or not do something that they should have, hence the name, “errors and omissions.”

Some of the businesses that are good candidates for E&O coverage include:

  • Tax preparers
  • Technology professionals
  • Insurance brokers
  • Real estate agents
  • Architects and other design professionals
  • Accountants 

A company can expect their E&O policy to be tailored to the line of business in which it engages. Insurance companies study the particular risks involved in a particular business line and write E&O policies for businesses in that line accordingly. An insurance company may offer to write a policy up to a certain coverage limit, which depends on the particular industry and business line.

What Errors & Omissions Insurance May Cover

 Here are some examples of things that may be covered by E&O insurance: 

  • An employee has misrepresented a service that causes a customer a loss
  • A design professional makes an error in a design that causes a customer to incur increased costs, either in repairs or by having to pay a contractor more
  • A business fails to meet a critical deadline and causes its customer a loss
  • A company fails to communicate a key fact to a client, which causes them damages
  • An agent of the company engages in self-dealing 

It is not unusual for there to be a dispute over whether an E&O insurance policy will cover a certain action. These disputes can arise between an insured and their E&O insurer, but also between insurers when an insured has a general policy from one insurer and an E&O policy from another.

Errors & Omissions Insurance Policies Are Customizable

E&O insurance policies can be customized based on a business’s needs. A standard policy may come with exclusions for certain actions. While some actions (such as criminal activity) may never be covered, a business may be able to negotiate with an insurance company for broader coverage. Of course, a customized policy could cost more, but it may be well worth it.

Companies will pay for E&O insurance on a per-employee basis. Businesses can expect to pay between roughly $500 and $1,000 for each employee. However, if a company is engaged in a higher risk activity with a chance of a greater loss, the rates could be higher.

What Errors & Omissions Insurance Covers

E&O insurance would cover all the costs related to a negligence lawsuit against a company, including: 

  • Judgments
  • Court costs
  • Attorneys’ fees
  • Settlements 

E&O insurance is so valuable because even if a business eventually successfully defends a lawsuit, the costs can be prohibitive. Complex cases could cost hundreds of thousands of dollars or more to defend. Small businesses may not have this money, and lengthy litigation could bankrupt a business even if it is eventually vindicated.

This Type of Insurance Coverage Should Be Part of a Comprehensive Insurance Strategy

E&O insurance is just one of many insurance products that a business needs to insure against risk. A business must continuously review its needs and policies to ensure that its risks are properly accounted for by the insurance it has. When policies are up for renewal, a business needs to carefully check its E&O coverage to ensure that the language of the new policy is similar and there are no new exclusions.

Some things that may not be covered by E&O insurance include: 

  • Sexual harassment and other employment actions
  • Illegal activity
  • Bodily injury or other property damage
  • Data breaches
  • Property damage caused by a business

While a company would still need these coverages, they should obtain them from other sources as part of their comprehensive insurance strategy.

The Difference Between Errors & Omissions and General Liability Insurance

E&O insurance provides different coverage than general liability insurance. When a business takes out a general liability policy, it is insuring against physical injuries that occur on its premises or due to its products. General liability insurance could cover physical damage caused by employees, such as when a worker is involved in a car accident while on the job. E&O insurance covers actions that professionals do in the course of their job when it involves their judgment and expertise. 

Insurance companies will need to price all risks when they quote an E&O policy. Businesses may face numerous frivolous lawsuits that can run up costs. Thankfully, E&O insurance does not only protect companies against meritorious lawsuits. Businesses can be forced to spend valuable resources just to get a frivolous lawsuit dismissed, and they cannot be assured of receiving court costs and attorneys’ fees awarded in every case—frivolous or not—that gets dismissed. E&O insurance can help reduce or eliminate these costs. 

Hopefully, a company will never need to file a claim under its E&O policy. However, it is better for business owners to be safe than sorry and take out as much E&O coverage as is necessary to protect their business.