What Errors and Omissions Insurance Is All About:
Although the service sector is one of three economic sectors, it encompasses over 80% of all employment in the U.S. Unless your business is in extraction (such as mining or farming) or production (such as construction or manufacturing), you’re doing work in the service industry.
This means that your business provides services directly to customers, be they individual clients or other businesses. This could be anything from tax advice to plumbing. As a service company, you and your employees must make decisions on a daily basis that provide benefit to your clients. Occasionally, either you or your employees may miss a few steps in providing that service.
Error and Omissions Insurance (also known as E&O) is insurance any company in the service sector should have to help cover the instances where either your or your employees make mistakes.
Read on to understand if this type of insurance is right for your business.
What Is Errors and Omissions Insurance?
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 errors or omissions that occur while performing contracted work.
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.
Do I Need Errors and Omissions Insurance?
Errors & Omissions Insurance may come in handy if:
- Your company provides physical or advising services
- You have employees who complete contracted work
- You are the sole proprietor and operator of a service company
- The services your business offers are complex
- Your business has a steady stream of clients
- You have clients that require you to purchase this type of insurance as part of the contract
Still not sure what you need?
CoverWallet's Insurance Checklist , you'll find a list of insurance types needed for your specific business or industry.
What Does Errors and Omissions Insurance Cover?
At a High Level...
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. Your business will be able to purchase E&O for less than what a major claim will cost.
Getting Into the Details...
Errors and Omission Insurance is meant to cover the second, key area of concern for businesses. The first, accidental property damage or bodily injury, is covered by General Liability Insurance policies. 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 not only insure the entire business, but is meant to insure all employees who complete the work and any subcontractors. This insurance is designed to be specific to each type of industry. No two policies will be alike. However, many policies will carry a retroactive date in order to cover claims for issues that occurred before the policy was purchased. Even if a settlement payout is not needed, most policies will still cover the legal costs involved in defending against an accusation.
E&O Insurance coverage is an important product for many types of businesses to consider. Real estate E&O Insurance is particularly important, as clients may feel that costs exceeded what they expected. Real estate errors and omissions insurance may be similar to e&o insurance for insurance agents. Both industries rely on selling products to clients, who may feel they were mislead, or where errors in dealing with complex paperwork can occur. Whether you need real estate E&O Insurance, Errors and Omission Insurance for insurance agents, any other industry, errors are always a possibility.
This type of insurance changes depending on the industry, and can cover instances such as:
| Type of Claim | Description | Example |
|---|---|---|
| Professional Negligence | Coverage for claims due to employee negligence such as omissions or general errors. | If an employee omits an important detail for contracted work, this insurance will cover claims that may result. |
| Retroactive Claims | Coverage for claims related to errors from previous contracted work. | If a claim arises for errors or omissions in an expired contract, this insurance may cover the costs. |
| Subcontractor Errors | Coverage for claims made as relating to errors committed by subcontractors. | If a subcontractor who has only been hired to work on a single project makes an error or omission, related claims will be covered. |
You’ll Know It’s the Right Policy If It Covers:
- Your industry’s needs
- Your business and your employees
- Subcontractors
- Legal fees and defined portion settlements
What Does Errors and Omissions Insurance Not Cover?
Errors and Omission Insurance covers mistakes that were made in good conscience. It does not cover purposefully misleading or purposefully erroneous acts. E&O Insurance also does not cover illegal acts committed by your company or your employees. Acquiring an Error and Omissions Insurance quote should help you fully identify what will and will not be covered.
Here is a list of things not covered by Errors and Omission Insurance:
- Property damage
- Bodily injury
- On-the-job injuries
- Worker’s Compensation
- Client misunderstanding of contract details
What Are the “Limits” on an Errors and Omissions Insurance Policy?
Errors and Omission Insurance policies will always have coverage limits. Policy limitations can reach as high as $1 million. Any claims that result in settlements or other costs that stretch beyond the policy limits will not be covered. Error and Omissions Insurance policies are also limited only to the business, its employees and any subcontractors. Work that was done outside of a contract often will not be covered by the policy. Errors and Omissions Insurance cost should more than make up for these limitations.