In the past half century the services sector in the United States has matured into our most important economic engine. Errors & Omissions Insurance (Professional Liability) is the primary coverage businesses and individuals providing these services purchase to protect from claims of mistake or misrepresentation. Without this valuable insurance, a mistake or misrepresentation can cause a loss great enough to put the average small business out of business.
Tax advisers, software developers, lawyers, consultants, even barbers should consider Errors & Omissions coverage essential. If a mistake is made, the modern cost of liability defense and judgements awarded against the business average in the hundreds of thousands of dollars.
Error and Omissions Insurance (also known as E&O) is an insurance any company in the service sector should have to help cover the instances where either you or your employees make mistakes.
Read on to understand if this type of insurance is right for your business.
This type of insurance is often an oversight for many new companies who may not realize its importance. E&O Insurance is designed to help insure against claims related directly to its name, “errors” and “omissions”. This covers a potentially wide range of issues, but specifically is meant to help your company cover potential damages as a result of a mistake made while providing a professional service.
Every business in the service sector is hired by a client to either perform some type of task, or to provide advice related to your field of expertise. For most companies, this works out well. However, humans can make mistakes. If a client believes your work was not done correctly (error) or an employee missed or forgot an important step in completing that contracted work (omission), your business could be liable for damages due to negligence or a perceived breach of contract.
Errors and Omissions Insurance is designed to help mitigate those costs. Many businesses believe that they are not at risk for lawsuits related to employee mistakes. However, any business that does contracted work can be sued for negligence. While some clients may choose not to pursue legal action in situations where errors or omissions have occurred, not every client will be forgiving. Some mistakes can be extremely costly for clients, who may then choose to pursue legal action to reimburse their costs. The bigger the contract, the more exposed your company could be to such legal consequences.
Getting into details...
Coverage for claims due to employee negligence such as omissions or general errors Example: If an employee omits an important detail for contracted work, this insurance will cover claims that may result.
Coverage for claims related to errors from previous contracted work. Example: If a claim arises for errors or omissions in an expired contract, this insurance may cover the costs.
Coverage for claims made as relating to errors committed by subcontractors. Example: If a subcontractor who has only been hired to work on a single project makes an error or omission, related claims will be covered.
Errors & Omissions Insurance may come in handy if:
The standard Errors & Omissions liability limit for a small business is $1,000,000 in coverage per claim. As sales or company assets grow above $1M your company should start to consider higher limits. It is also common for larger corporations to expect their professional services vendors to carry $5M or even $10M. This is quickly becoming the standard for larger Technology Errors & Omissions requirements. That policy will often include cyber limits within the coverage.
E&O Insurance covers claims relating to mistakes you or your employees may have made. Although this may seem overly simplistic, the reality is that there is a high probability for errors to occur in most service sector businesses. More specifically, if your business is contracted to do work that you fail to do properly for any number of reasons, it could cost your client a lot of money. If that happens, your client may hold you responsible. As such, this insurance covers the cost of reimbursing the client for their lost revenue as a result of errors your company made. This insurance will cover most mistakes, whether the mistake was a simple (yet costly) oversight, or an error in judgement by an employee. The cost for Errors & Omissions Insurance is always a small proportion of what a major claim will cost.
Errors & Omissions Insurance is the key liability policy for services companies in the same way General Liability is key for a retail store. General Liability covering claims of bodily injury or property damage is most likely to be used if your customers come and shop inside your store. Products Liability (often included in General Liability) is most important if you manufacture a product. Errors & Omissions is the insurance coverage which protects against claims of financial injury caused by your services product. What if an employee misses a costly typo or a trucking company dispatcher sends a driver to the wrong distribution center? No physical injuries are incurred, nor is there any property damage to worry about. However, something as seemingly small as a typo could cost a client thousands of dollars to reprint materials. A truck driver sent to the wrong distribution center could result in lost revenue due to spoiled product or product that did not reach its destination in time.
E&O Insurance is designed to cover the costs of these kinds of mistakes, and more. This insurance will cover the business, its employees, and often subcontractors too. It is important to remember that these policies are most often written on a claims made basis and this has ramifications for claims made against you and your business for work performed in the past. The policies carry a retroactive date in order to cover claims for issues that occurred before the current policy was purchased. This retroactive date will be the date your business first purchased the Errors & Omissions Insurance, as long as the coverage has remained in continual force since then. For this reason it is important not to allow the coverage to lapse.
There is no easy answer as to how much Errors & Omissions insurance will cost due to the vast differences each business can have. It is always best to work with a professional insurance agent so that you can give them all of the details about your business and they can help tailor the policy to your specific needs. Some factors that the insurance company will consider when pricing the policy include:
• Your claims history • How many employees you have • Your annual revenue • Policy limits to include coverages and deductibles if applicable • Experience in the industry, even as a non-owner of a business
Clients want you to have this important insurance because it will protect them if you are negligent and cause them a financial loss. They are trusting you to either provide them with sound advice or get the job done right, and don’t want to be negatively impacted if you make a mistake.
D&O insurance provides protection for directors and officers of an organization against claims arising from the management of the business. E&O provides coverage for a professional if there is a claim against them from the provision of their professional services.
General Liability Insurance covers claims of injury, bodily or physical, and property damage. Often, it is offered in a package with Property Insurance. This insurance is meant to protect your business against accidents that occur on your property and at any other covered locations. Commercial General Liability makes it so your business carries on while it faces claims, such as negligence.
If a worker gets injured on the job and requires medical treatment, you’ll be happy to have a Workers’ Compensation Insurance plan. This plan will also cover lost wages and services that help an employee recover and get back to work.
An insurance plan good for small to medium-sized businesses, BOP packages together elements of General Liability and Commercial Property. Depending on the carrier, a Business Owners’ Policy plan may include elements of Crime Insurance and EPLI.
This type of insurance protects your business’s physical assets, such as workspace and computers. The plans vary but are usually categorized by the kind of event that led to the loss. Fires and natural disasters are great examples of this. Plans can be customized based on location and business-type, so if you live in a flood zone, you can get additional coverage to protect your business.
This insurance is great for businesses who offer advice to their clients. Professional Liability Insurance specifically covers a business from being liable should an error or omission occur, that leads to a financial loss for the customer.
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