What Is the Average Cost of Errors and Omissions Insurance?
Errors and Omissions insurance—also known simply as an E&O policy—is a type of liability insurance instated to protect employees and employers against claims made by a client. These claims, pointed at a business for their inadequate or negligent services, are based on the fact that these errors cost the client money.
Should a lawsuit occur, legal fees accrue, or fines be administered, an Errors and Omissions policy safeguards the business from a financial downfall. In today’s evermore litigious climate, an E&O policy has never been more relevant. But for such a broad shield, how much does Errors and Omissions insurance cost?
Mostly, is it affordable?
What Factors Go Into Errors and Omissions Insurance?
While we’ll break down the average cost of Errors and Omissions insurance below, it’s important that we understand how an E&O policy is calculated. This is paramount to have your head around, as the dynamic and all-inclusive nature of this specific insurance varies greatly by industry.
In which case, a few baselines considerations insurers use to calculate an E&O policy include but are not limited to:
Company Size – The amount of employees you sustain is going to greatly affect your liability policy. If this number is on the larger side, that means more room for error. Thus, a higher insurance policy.
- Revenue – The amount of revenue your company generates will also affect your E&O policy. There’s a big difference between safeguarding a side-hustle that produces just over $100k in revenue annually, versus a company with revenue in the millions.
- Your Industry – What industry does your business work in? Is it one that’s infamous for lawsuits and wrongdoing? Or are all the processes generally straightforward?
- Business Location – What state do you operate in? Often, costs associated specifically within a region can impact liability insurance. A Wyoming lawyer will cost you considerably less than one in the heart of New York City.
- Safeguards & Contracts – What’s your quality-control process like? Do you have one? Furthermore, who handled the initial legal? If you had a great attorney build the language for a given service you’re offering, your liability policy will take that into consideration and likely bless you for it.
- Previous Lawsuits – Are you looking for E&O insurance because of something that occurred to you previously? Have there been lawsuits in the pipeline? The insurance company will use this information to assess the risk involved with your business.
- Employee Training – Another extremely important facet—being that employees can often be the cause of these mistakes—is how well you train your employees. What does the process look like, and how streamlined is it?
Dependent on the company, an insurer will consider more factors than the above. However, these serve as a strong baseline for what affects an Errors and Omissions insurance cost.
The Versatile Nature of Errors and Omissions Insurance
Now we come around to important details about Errors and Omissions coverage: what is it and how does it work? The reality is that a sound E&O policy will safeguard a business—mostly—against legal fees associated with a claim. Even if the claim itself is baseless or without reason, the insurance coverage will protect the business from having to burn cash simply to prove that a client is nefarious or fraudulent.
And, due to the umbrella of things that an E&O policy should cover, often the contracts and policies are multilayered.
For instance, Brian Frencetich, director of GSRIA, who has been pairing RIA’s with E&O policies for over a decade, says:
The typical contract may be 60 pages or more of granular detail, so it’s always going to be challenging to shop for E&O policies, even for people with a lot of experience, E&O is hard for RIAs to really comprehend. Even if you have read the whole contract, there is so much in there. It’s going to be hard for anyone to understand everything that’s contained or implicated in the document.
The key takeaway here is that Errors and Omissions coverage erects a sizable shield, thus the complexity of the policy scales in tandem with the complexity or risk-pervasive nature of a given outfit.
The Average Cost of Errors and Omissions Insurance
In 2017, a study was done by Insureon regarding E&O policies. They analyzed over 18,000 businesses that had sub 10 employees—that applied for Professional Liability Insurance (another name for Errors and Omissions Insurance). They discerned the following:
- The average annual cost for a small business policy is $1735.60
- The median annual cost for a small business is $920
When these numbers are taken into consideration, most would agree that less than $2k is an extremely low number to pay when a business could face financial ruin beneath the pressure of lawsuits, fines, and potential settlements.
With that being said, the type of liability coverage chosen will dramatically affect the pricing structure. Typically, for a decent E&O policy, a small business should expect to pay anywhere from:
- $400 to $2000 annually
However, if the risk portfolio of a given company raises a massive red flag, then the policy can be well above two thousand dollars. Again, these are generalities—the versatile nature of an E&O policy makes it difficult to throw an objective price tag on.
Lastly, the most commonly chosen limit is:
- $1 million per occurrence
- $1 million per annual aggregate
Within This Cost, What Should An E&O Policy Cover?
If we’re to take its average cost, then what does Errors and Omissions Insurance cover? Again, each policy and insurer will provide different prices and structures, but typically you can expect:
- Defense Costs – This is a dollar value related to hiring a lawyer or paying for legal fees simply to defend your business in the wake of a claim.
- Alleged or Actual Negligence – A policy should cover the expenses related to the relevant damages brought forth by a negligence claim. Even if these claims are simply alleged.
- Independent Contractors – If an error was made by a temporary hire or a subcontractor working for your business—one that resulted in a claim filed against you—an E&O policy should protect you against any legal expenses that come from this event.
- Past Services – An E&O insurance policy covers the client once a claim is made. However, a claim can be made in the present, yet related to work rendered in the past.
- Claim for Damages – If the person making the claim is looking to be issued an award (sum of money for their “losses”), then an E&O policy should safeguard the business from falling victim to this lump sum of money.
- Libel or Slander – A facet of personal injury, an E&O policy can protect a company that experienced damage to their character, thus causing financial losses and other hardships.
- Copyright Infringement – Despite a company’s best efforts to remain compliant with the laws of intellectual property, mistakes happen. This is the nature of business. In which case, should a mistake be made and a claim filed, an E&O policy will act as a safeguard.
As you can deduce from the above examples, the cost for Errors and Omissions is greatly justified being that they protect a business from all sorts of legal and other fees associated with a client rendering a claim.
No Matter the Cost, Questions To Ask
No matter what quote you receive for an Errors and Omissions policy, it’s paramount that you understand the ins and outs of the contract intuitively. There are horror stories of companies paying exorbitant sums for their E&O policy only to realize that they weren’t fully covered when someone makes a claim.
Alas, the fine print. It’s important. A few questions that will help you create visibility on your contract include:
- The policy, does it cover both Errors and Omissions?
- Does my insurer assume responsibility to defend me despite the claim? Or can they find me guilty of a mistake and negate the coverage?
- What are my limits?
- What does my policy not cover?
- Does my policy cover most legal expenses expected from such circumstances?
- This E&O policy, does it provide me a lawyer? Or do I have to find my own? If so, what are the restrictions?
- Will I be covered in full if I lose against a claim?
- Will I be covered even if the claims are baseless or fraudulent?
- Are my contractors, temporary hires, and full-time employees covered beneath my policy?
- What’s my deductible?
- What’s my coverage for copyright infringement? (it can be different than the entire policy, as fines tend to be heftier for this particular issue)
- Will my E&O history affect my other insurance rates?
We’ve bolded the less obvious questions, seeing as they can often go overlooked. By using the above as a template, you create the foundation for a full understanding of your Errors and Omissions insurance policy.
Errors and Omissions Insurance, More Important Today Than Ever
In truth, E&O policies have never been more important—particularly if you live in America. We’re a lawsuit-happy society, with industries that have yet to be fully regulated. Many businesses operate in a terrain that’s like the Wild Wild West, just digital.
And, being that the average cost of a policy per year is $1735.60, that’s a small price to pay when a client decides to sue in the hundreds of thousands. Despite this, not every company needs an E&O policy… yet some are legally required to have one in place. This is exactly why there are experts to help identify who needs Errors and Omissions coverage for their company.
Thus, if you’re looking for someone to help you navigate the complexity of an Errors and Omissions policy, you’ve come to the right place. Here at NOW Insurance, we can help. Just reach out to talk to one of our experts and we’ll address any questions or concerns you might have!
Sources:
- Tech Insurance. Errors & Omissions Insurance, The Comprehensive Guide For Small Technology Businesses. https://www.techinsurance.com/Portals/0/resources/errors-and-omissions-insurance-ebook.pdf
- Plan Adviser. Will Your Errors and Omissions Insurance Policy Keep You Dry? https://www.planadviser.com/exclusives/will-errors-omissions-insurance-policy-keep-dry/
- Insureon. How Much Does Professional Liability Insurance Cost?
https://www.insureon.com/small-business-insurance/professional-liability/cost
