What Is Errors and Omissions Insurance?
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Errors and omissions insurance, also called professional liability insurance or E&O insurance, covers claims of errors, omissions, or negligent acts made while providing professional services. This type of insurance is designed to protect professionals, such as lawyers, accountants, consultants, and architects, from the financial consequences of these types of claims. Keep reading to see how E&O insurance helps when you’re sued for a professional liability claim and how much this coverage will cost.
How Does Errors and Omissions Insurance Work?
Errors and omissions (E&O) insurance is designed to shield employers and employees — whether part-time, full-time or contracted — and employers from accusations of negligence, misrepresentation, inaccurate advice and personal injuries, such as libel or slander. If these claims lead to a lawsuit, E&O insurance will pay for legal expenses, such as attorney or arbitration fees and settlement costs up to your policy limits.
Professional liability insurance will protect you from claims made for past services. Long after the work on a project has been finished, claims might still be filed against a person or company. Your insurance provider can still cover these claims if your policy is set up as a claims-made plan with a tail (retroactive date). If the incident being reported occurred after the tail period had begun, your current policy should cover your losses.
Consider this example: Say an accountant makes a mistake on a client's tax return that leads to financial losses for the client. The client sues the accountant for these losses plus pain and suffering. E&O insurance pays for the cost to retain a lawyer plus the settlement to close the lawsuit.
Is Errors and Omissions Insurance Required?
Errors and omissions insurance may be required depending on the type of business you have and where your business is located. E&O insurance is also commonly required by clients or contracts as a condition of doing business. For example, real estate agents in the below states are required to get E&O insurance before they can get their real estate license:
Overall, anyone who provides professional services and is at risk of being sued for errors or omissions should consider purchasing errors and omissions insurance. Even if not required by law, E&O insurance is generally recommended for businesses and professionals that provide consulting, legal, financial or some other professional service. These types of businesses may be at higher risk of being sued for professional errors made while working with clients.
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What Does E&O Insurance Cover?
E&O insurance can cover legal fees related to multiple types of claims for services rendered, including negligence, copyright infringement and pain and suffering. Lawsuits can often incur high legal fees, which is why E&O insurance is so useful for professions, like lawyers, accountants and consultants.
Errors and omissions insurance can defend your company against charges of negligence: should a business or person fail to behave with due care and injure another party. An injury can refer to giving inaccurate advice, delivering a product late or leaving out information from a client. Your insurance will pay the claim's associated costs and any relevant damages that could occur.
Professional liability insurance will protect you if you are sued for copyright infringement, meaning any copyrighted material that is used without the expressed consent of the owner is illegal. Even though your company makes every effort to abide by intellectual property regulations, mistakes can still happen.
Failure to Meet Contractual Obligations
If your contract specified that your business had to meet some goal and you falled short, that client may sue you for that shortcoming. For example, a business may sue a marketing consultant because the marketing campaign did not produce the promised results. Similarly, a company may sue an IT company whose security program failed to protect against a security breach, resulting in theft of its intellectual property.
Libel or Slander
Errors and omissions insurance can help safeguard your business against personal injury claims, such as libel and slander. Libel relates to false statements that are published, whereas slander occurs when a false statement is uttered orally. An unintentional blunder that one of your employees makes about another company — whether true or false — can cause harm to that company’s reputation if it gains public attention. That company may attempt to sue your business, claiming that those false statements resulted in loss of sales and revenue.
Coverage While Outside the U.S.
E&O insurance may also provide coverage when you are out of the country, but only if you file a claim in the United States or U.S. territory.
What Isn’t Covered by E&O Insurance?
Like any insurance plan, there are certain events that are excluded from coverage. The table below shows what gaps you can expect to have in your E&O insurance policy.
Events Not Covered
Allegations of wrongful termination, employment-related harassment or discrimination by a current or former employee.
Any fraudulent, dishonest or unlawful behavior.
Third-party bodily injuries or property damage.
Allegations of patent infringement or trade secret theft.
Any services provided that are not listed on your policy. Regardless of profession, coverage will not pay for any architectural, medical, nursing, actuarial, insurance broker/agent or engineering services.
How Much Is Errors and Omissions Insurance?
The average amount you’ll pay for errors and omissions insurance can range from between $500 to $1,000 per employee according to The Hartford. Companies with 100 employees may pay up to $50,000 to $100,000 every year, ($4,167 - $8,333 per month). Actual costs will vary depending on the type of business you own, your claim history and where your business is located and more.
- Business size: The more employees you have, the higher the risk. The higher the risk, the higher the cost of coverage.
- Employee training: The more informed and better trained your employees are, the less likely there is for an event to arise that would cause you to file a claim.
- Existing contracts: Any document between you and another business or entity can carry with it higher or lower risk depending on how the contract is written.
- Coverage limits: The more coverage you want, the more you will have to pay.
- Annual revenue: There is a possible correlation between the amount of money a business makes and the number of risks it has.
What Happens if You Don’t Have Errors and Omissions Coverage?
Foregoing errors and omissions insurance leaves you financially vulnerable when your business commits a professional error — even if it’s the first time.
Without E&O insurance, legal costs can eat into your revenue and possibly bankrupt your enterprise. E&O insurance acts as your safety net, saving you financially when an honest mistake leads to a costly lawsuit.
How To Get Errors and Omissions Insurance
There are several commercial insurance providers offering E&O insurance, including:
- American International Group, Inc. (AIG)
- CNA Insurance
- The Hanover Insurance Group
- The Hartford
Make sure you understand the risks associated with your profession so you get the insurance your business requires and reassess your needs every year so your business stays up-to-date on coverage.
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Let SmartFinancial help you get the coverage you need for your business. Enter your zip code below or call 855.214.2291 and we’ll send you your free commercial insurance quotes.