What Does Errors and Omissions Insurance Cover?
Errors and Omissions insurance is a type of liability insurance that provides protection when either a customer or client accuses you or any of your employees of losing them money. This accusation typically highlights a mistake made on the business’ end.
For any sized business, these claims can be costly, even leading to financial ruin.
Thus, an E&O insurance policy protects you against the risk of these allegations or any financial hardship that surfaces because of them. But what does errors and omissions insurance cover?
What Does Errors and Omissions Insurance Cover?
Well, as new businesses and veteran companies offer professional services, there is always room for error. This is merely a part of the human condition. And when things don’t pan out as planned, it can result in a lawsuit. Here are but a few examples in which this professional liability policy could be the difference between money lost and your business protected.
- Take a shipment, for instance. A freighter shipping LTL mistakenly places cargo on the wrong truck. Due to the missed shipment, the client paying for the freighters sues—declaring that the missed deadline is directly correlated with money lost.
- Or a graphic designer. They’re extremely excited about a new job but overlook the trademark laws on one of their logos. Later, the company is sued for copyright infringement. The company then sues the graphic designer for negligence.
In both instances above, Errors and Omissions insurance coverage will protect the party being sued (freighter and graphic designer). But how does it work?
How Does an E&O Policy Protect a Business?
Let’s better understand Errors and Omissions Coverage – what is it and how does it work to protect businesses? Oftentimes, an E&O policy will protect its policyholders from fees associated with a lawsuit. A few key areas of protection include but are not limited to:
- Legal Defense – It is commonly understood that legal fees are costly. Lawyers charge by the hour and sometimes require money upfront prior to working.
- Court Costs – Any documents filed, utilizing a court reporter, these processes cost money. An E&O liability policy can cover some—if not all—costs accrued.
- Judgments – If you happen to lose in trial, then you might have to pay a court judgment—or else have a lien placed on your business assets. E&O insurance hedges against this.
- Settlements – Many lawsuits are handled outside of the courtroom. How? Settlements. Businesses will often settle just to mitigate the defense costs of an extended trial. This is another place that an E&O insurance policy covers.
While this is only scratching on the surface of a fully comprehensive Errors and Omissions insurance policy, essentially the liability coverage is there for when things go wrong or other instances of negligence. And since clients can often make baseless claims simply because they are not pleased with the professional services rendered, the policy protects against both mistakes and potential wrongdoing (from the client’s end).
Do I need Errors and Omissions Coverage?
To better explain who needs Errors and Omissions coverage, Tyler Asher, president of independent agent distribution at Liberty Mutual Insurance, says:
Small-business owners, especially those that are embarking on a new business for the first time or a side hustle, there are so many things to manage … so many balls in the air, insurance is not always top of mind.
And for this reason, should they be unlucky and have a problem crop up, it can lead to the ruin of what they’ve been trying to build.
Thus, in most cases, you’re not legally required to have E&O insurance, but it’s highly advised if you want to safeguard your business… or if you provide a service that has a lot of room for error.
Is All Errors and Omissions Coverage The Same?
The simple answer to this is: No. Being that the E&O liability coverage policy covers a host of different claims and companies, it is often bespoke. It boils down to the specific risk portfolio of your company, then your size and needs are factored in as well. Additionally, it’s likely that:
- Certain policies don’t cover specific risks (think IP claims, cybersecurity, etc.)
- Policy limits vary
- Deductibles vary
- Exclusions vary
While it is easy to understand the purpose of E&O insurance and the general expenses it covers (in an oversimplification: legal fees!), the nuances are case-specific. Thus, an Errors and Omissions policy will cover the cost of whatever is agreed upon between you and your insurer.
It is paramount that you utilize an experienced, professional, and versatile insurer when it comes to an E&O liability policy—and that you understand what you are covered for intuitively. Understanding what the average cost of Errors and Omissions coverage is will help to ensure you have a strong policy in place. You do not want to spend money on a policy only to find out that a specific claim made against your business is not covered.
Errors and Omissions Insurance
In today’s litigious-happy environment, it is more important now than ever to protect yourself and your business. An errors and Omissions insurance policy will provide a layer of defense should a client claim that you were negligent, provided inadequate work, and cost them money.
As the adage goes: It’s better to be safe than sorry.
- CNBC. Your side hustle may be at risk – here are steps you can take to protect it.
- Investopedia. Errors and Omissions Insurance (E&O)
- The Insurance Journal. The Ins and Outs of Errors and Omissions Insurance.