Quick Guide to Errors and Omissions Insurance
If you own a business that provides a product or service to customers, you need Errors and Omissions coverage. Also known as Professional Liability Insurance or Malpractice Insurance, this type of liability coverage protects your business against accusations that you have misled your client.
E&O Insurance not only covers your business, but also covers you in the event that your negligence or failure to perform a service has caused financial loss for your client. Coverage also includes bodily injury or property damage should the damage result from either providing or failing to provide professional services.
Who needs Error and Omissions insurance?
E&O insurance has traditionally been associated with professions that command a high degree of specialized knowledge and/or skill, such as attorneys, accountants, physicians, architects, and engineers. Often, these professionals need to take continued education as well as renew licenses and certifications to stay up-to-date on changes in their industry that impact how they perform their jobs.
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In today’s world, any professional who provides a product or service to a client in exchange for payment exposes themselves to E&O risk. This can range from mortgage and securities brokers to actuaries, travel agents, and web hosting companies. Depending on your profession, E&O Insurance may be required by the state in which you live or a regulatory body, such as the American Board of Medical Specialties (ABMS) or the Financial Industry Regulatory Authority (FINRA).
If your business falls into any of the following non-traditional E&O categories, you should serious consider E&O Insurance:
- Media companies
- Technology providers
- Financial institutions
- Insurance companies
- Staffing companies
- Life sciences laboratories
- Research companies
- Public relations and advertising firms
- Web-based businesses
What does Error and Omissions insurance cover?
E&O Insurance offsets costs that arise out of lawsuits stemming from negligence, mistakes, and malpractice. This includes attorney fees, court costs, settlements, and judgements.
Here are some common areas of exposure based on profession:
- Physicians – Incorrect diagnosis, treatment or surgical error, lack of informed consent
- Attorneys – Conflict of interest, failure to file within statute of limitations, failure to know the law
- Accountants – Errors in audits or financial statements, negligent tax filings
- Advertising agency – Ad campaigns that fail to generate intended revenue for client, an ad is perceived by customers as offensive and client sues
- Travel agent –Negligence in recommending a destination or travel supplier where your client gets injured
- General contractors – Faulty workmanship, improper selection of material, pollution incidents including mold
- Wedding planner – Event date mix-ups, third-party vendor complaints
Keep in mind that E&O Insurance coverage is “claims-made” which only covers you for events that occur while you have coverage. This means that if a client sues you for shoddy work you performed prior to obtaining coverage, you won’t be able to access your benefits for that incident.
What is not covered by E&O insurance?
It is extremely important to read through the exclusions on your E&O policy so you can identify in advance the areas of exposure that will not be covered. While there are no standard policy wordings, generally, E&O Insurance does not cover:
- Intentional wrongdoing or harm, or malicious acts
- Illegal acts
- Guarantees or warrantees
- Punitive damages
- Claims stemming from previously known but undisclosed errors
- General liability
- Employee injuries
- Employee lawsuits
- Property damage
- Services as a director or officer of a company
In addition, depending on the industry you are in, there may be frequent losses that you are exposed to that are not covered under E&O policies. For example, travel agents and tour-operator owners are not covered for the majority of errors and omissions, such as misquotation of prices or cancellation of provisions.
How much does E&O insurance cost?
Though policies vary, it will depend on business type, location, claims experience (individual and industry), and the insurance company. Underwriters also vary in what they want to review such as copies of contracts, standard operating procedures (SOPs), and other documentation.
You can reduce your exposure to E&O risk as well as avoid claims by implementing the following best practices into your business operations:
- Negotiate a written, agreed upon contract signed by all parties that includes a detailed scope of work outlining what work will and will not be performed, a specific timeline, and cost. Make copies for you and your client.
- Research prospective clients and seek references if available to verify they are clients you will want to work with in the first place.
- Manage client expectations so there are no unnecessary “surprises.”
- Be honest and ethical at all times.
- Terminate a client relationship if necessary or do not renew a contract if you anticipate future problems with your client.
- Keep all required licenses, certifications, and training current and always be ready to provide proof to your clients.
- Notify your insurance agent immediately if you believe an incident might turn into an E&O claim.