Errors and omissions (E&O) insurance is a crucial type of liability insurance that covers claims against your business for professional mistakes or services not provided. E&O insurance protects your business from clients claiming negligence, malpractice, errors, or omissions allegedly made while delivering professional services. The insurance helps cover legal fees, owed damages, or settlements.
Key Points to Remember
- Errors and omissions insurance shields your company from client claims of negligence, mistakes, faulty advice, or failure to deliver as promised.
- Any business offering professional services or advice typically needs E&O insurance. This includes insurance agents, doctors, lawyers, wedding planners, and financial advisors.
- E&O insurance does not cover claims for property damage, bodily injury, workplace injuries, data breaches, intellectual property infringements, or criminal acts such as fraud.
- The cost of E&O insurance varies based on business size and nature. The average premium for a small business is about $735 annually.
Understanding E&O Insurance
E&O insurance, also known as professional liability coverage, covers your business against claims resulting from errors or mistakes, poor advice, or unmet service levels. It also covers claims from failing to meet deadlines or other contractual terms.
For instance, suppose a manufacturer hires your IT consulting firm to upgrade its software. Several months later, they sue your company for $50,000, claiming inadequate advice led to software malfunctions and missed orders. An E&O policy might cover damages or settlements arising from these claims, as well as legal defense costs, regardless of the claim’s validity or your business being liable.
Tip
For businesses operating internationally, seek an E&O policy with worldwide coverage. Avoid any policy restricted to incidents within the U.S.
Who Needs E&O Insurance?
Consider purchasing an E&O policy if your business involves giving advice or providing professional services for a fee. This includes accountants, architects, real estate agents, consultants, financial advisors, wedding planners, fitness instructors, and physical therapists.
Certain professionals, such as attorneys, contractors, and medical personnel, may be legally required to obtain E&O insurance before practicing. Meeting E&O insurance requirements might also be necessary for obtaining or renewing a professional license or fulfilling client contract terms.
What E&O Insurance Doesn’t Cover
Typical exclusions in E&O policies include:
- Bodily injury or property damage
- Employment-related issues like wrongful termination and discrimination
- Fraudulent or criminal acts
- Worker injuries
- Patent infringements or other intellectual property violations
- Data breaches and theft
Carefully read your policy to grasp what it does and doesn’t cover.
How to Choose an E&O Policy
Covered Risks
Select an E&O policy based on your business nature and covered risks. Many E&O policies are tailored for specific occupations such as attorneys, accountants, or real estate agents, ensuring relevant coverage.
Additionally, some E&O policies cover broad risks common across various businesses, such as employment practices liability insurance, which handles claims from workplace violations like discrimination or wrongful termination.
Coverage Limits and Costs
E&O policies are a trade-off between cost and protection level. Policies with higher limits usually cost more. Compare both per-occurrence and aggregate limits when evaluating policies. For instance, an E&O policy might have a $250,000 per claim and $1 million aggregate limit.
Ensure you compare insurers based on total coverage value. Check the policy deductible—the amount you must pay out-of-pocket before insurance coverage kicks in. Higher deductibles often result in lower premiums.
Most E&O policies are claims-made, covering claims made during the policy term. They don’t cover claims filed after policy expiration. However, occurrence policies cover incidents during the policy term regardless of when the claim is filed, offering broader but costlier coverage.
Tip
When shopping for E&O insurance, opt for a policy covering legal expenses in addition to limits. Avoid policies including these costs within the limit.
How to Buy E&O Insurance
Start with your general liability insurer, as many offer E&O coverage, sometimes via an endorsement to general liability or business owners’ policies. If unavailable, seek quotes from business insurance agents or online.
E&O insurance costs vary by industry. Factors impacting premiums include business size, claim history, and coverage limits. Many small businesses can secure an E&O policy for roughly $735 per year.
Conclusion
Errors and omissions insurance (E&O) or professional liability insurance, protects your business from claims of negligence, poor advice, errors, or omissions. It covers damages, settlements, and legal costs arising from such claims. E&O insurance is crucial if your profession involves giving advice or providing services for a fee.
Why Is E&O Insurance Vital?
If a client sues for professional errors, your general liability policy won’t cover it. E&O claims can be financially devastating, especially for small businesses. Without E&O insurance, you would cover damages, settlements, and legal fees personally, and a single large claim might bankrupt your business.
Example of E&O Insurance
Medical malpractice insurance is a type of E&O coverage protecting doctors and healthcare professionals from patient claims of professional negligence. It covers negligence, medical errors, or accidental oversights. Some state laws may require certain medical practitioners to have malpractice insurance before obtaining a practice license.
Difference Between E&O Insurance and General Liability Coverage
General liability insurance covers third-party claims for bodily injury or property damage occurring on your premises, products, or business operations. E&O insurance specifically addresses client claims of professional mistakes or faulty advice provided during professional service.
Related Terms: general liability insurance, commercial insurance, malpractice insurance.
References
- North American Securities Administrators Association. “Broker-Dealer E&O Insurance Could Provide Relief for Investors with Unpaid Arbitration Awards”.
- Chubb. “What Is Professional Liability or E&O Insurance?”
- Insureon. “When Is Errors and Omissions Insurance Required?”
- The Hartford. “What Is Errors & Omissions Insurance Coverage?”
- TechInsurance. “How to Compare Errors and Omissions Quotes”.
- US E&O Brokers. “Claims-Made vs. Occurrence E&O Insurance”.
