Errors and omissions insurance, also known as Professional Liability, Professional Indemnity, Malpractice Insurance, or simply E&O, protects a business against lawsuits pertaining to professional services. It covers claims of mistakes, omissions, misrepresentation, negligence, and more if you are sued due to your professional work.
Picture this - you're a business consultant and your client is a large supplier for the automotive industry. You identify a new supplier for some key engine parts and your client decides to take your advice. Months later, the business is sued due to a class action lawsuit, and the engine part you recommend was faulty.
If your business provides any information or professional services to other people and businesses, then an E&O policy needs to be considered. Errors & Omissions Insurance is designed to protect your business from lawsuits, negligence, omissions, commons mistakes, but it can often include multiple layers of coverage such as Cyber Liability & Data Breach. Errors and omissions claims can be expensive and that's why it is best to prepare.
Most policies like General Liability and Management Liability, don't cover service-based claims. A business can acquire general liability and errors and omissions policies simultaneously because each addresses different situations. General liability will cover bodily injury and property damage caused by either the product or services of a business. On the other hand, errors and omissions insurance focus on claims related to the professional services that result in a third party loss.
Errors & Omissions Insurance covers the legal costs and damages due to unintentional activities. Some of the most common claims covered under an Errors & Omissions policy include:
- Poor Business Advice: When a consulting company is sued for offering advice that results in a loss for its client, professional liability pays for legal costs incurred.
- Violation of Trust: Any form of poor cooperation or negligence in information sharing could get a business sued. Any information not fully shared with a client or not well presented can be termed misleading. In such a case, this policy will cover the outcome of the legal proceedings.
- Employee Errors: Claims based on errors made by employees either part-time or full-time are the responsibility of the company. A service company would be liable for errors and omissions that may have coated its clients.
- General Claims of Loss of Earnings: Earnings lost due to expected service delivery that falls short of expectation or played out badly may result in a legal back and for that can eventually require repayment. An errors and omissions policy will cover such a case.
- Copyright Infringement Claims: Depending on the agreement in a policy, an unintentional violation of copyright in the form of logo, design, or text is also covered.
Overall, errors and omissions insurance gives a good coverage for technology claims, real estate claims, tour and travel agency claims, venture capital, and more. It's often advised to purchase errors & omissions policy right from the inception and not to miss renewals. The policy is required to be active when a claim issue occurs and when it is filed. If at any point the policy is not active and a claim occurred, it may not be covered later when the claim is issued if the policy is now active.
ADVISOR TIP: Most E&O policies are "claims-made". This means that the policy must be active when the claim occurs and when the incident occurs for coverage to apply. This is why it's vital to get this early on as claims can arise much later then when they actually happen.
Every business tries to conduct its activities with caution and utmost scrutiny. Regardless of the measures in place or how well services offered have been designed, errors can occur. You may be great at your job, but accidents happen and people can be... well, people (hello, crazy client).
If a business offers services that could have a material impact, that can lead to loss of money or can be misinterpreted, then it's appropriate to purchase professional insurance.
Some cases may not even relate to money. For example, a client or customer, regardless of the industry, can claim the deficiencies of your business' services ruined its reputation or caused emotional distress. In that instance, a lawsuit can be filed and you'll need defense, potentially money to settle.
Businesses that offer consultancy services or professional advice are likely to face lawsuits if the service or advice given causes a loss for the client. For example, technology ventures should understand how bugs in a design may cause technological tools to misbehave. And a lawyer should know they are exposed if they provide the wrong legal advice. Any claim of monetary loss or tainted reputation by the client can result in a lawsuit even though the error isn't intentional.
Here's some of the most common businesses utilizing E&O insurance:
- Technology Services
- Financial Advisors
- Business Consultants
- Media & Advertising
Some questions to ask yourself if you are on the fence about E&O Insurance:
- What could happen if a made a mistake or upset my client?
- Do I ever provide advice or professional information that could affect my clients business?
- Do my clients use any data or other information provided by me to operate their business?
Similar to most policies, an intentional act would not be covered. Any claim ascertained to be intentional counts as a criminal offense which the policy will not cover.
As stated before, if you are on a claims-made policy and you do not report a loss during the policy period, a claim would not be covered. If on a Claims Made policy, then the claim must have taken place and submitted during the policy period. Also, unless indicated in the policy agreement, a professional liability would not cover property damage claims or that bodily injury.
Last, if you are aware about a claim before you purchase and bind an E&O policy, then a claim will not be covered.
It's difficult to pinpoint the amount a business will pay for Errors and Omissions insurance. In most cases, a couple of factors affect the cost of professional liability insurance. Such factors are:
- The Industry of the Business: The industry of a business determines the frequency of claims. Certain businesses are bound to face more legal issues than others. The industry of a business also determines how expensive claims can be. For example, the cost of claims for a law firm varies greatly from that of an event planning firm (especially in litigation-friendly states).
- Size and Track Record: Businesses with more employees tend to pay a higher premium (more people = higher chance of claims). Additionally, the number of claims over the years will affect the amount of premium to be paid. A business with numerous claims over the years is likely to pay higher than one with fewer claims.
- Coverage Limits: More coverage means a higher premium especially if an occurrence limit is selected. An occurrence limit entails the amount an insurer pays out for each claim, and this is recommended for full protection. The other option is an aggregate limit which only shows the entire payable amount during a policy period.
- Deductible: a policy deductible which is the amount a business will pay before coverage comes into play can as well determine the cost of the premium.
The average cost of an Errors & Omissions policy is around $3,000 per year. Some small businesses can pay less, but if your business is primarily providing advice or information to other business, then we recommend budgeting $5,000 to $10,000 per year for insurance.
Speak with a Fullsteam Insurance Advisor today and learn more about coverage, pricing, and the process to get quotes.
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