What Is Errors and Omissions Insurance?

What is E&O insurance?

E&O insurance — a form of professional liability insurance — provides you, your business and your employees with coverage against lawsuits from clients claiming inadequate work or negligent action resulting from your professional services. Your business’s insurance policy will pay your legal fees, court costs and any settlements up to the amount specified in your policy.

E&O insurance vs. general liability insurance

Note the difference between general liability insurance and E&O insurance. General liability insurance provides coverage against claims that can arise when a third party is injured or property is accidentally damaged on your premises, such as a customer trips on the carpet in your store and hurts their arm. It also covers damages that an employee causes on the premises of a third party. However, general liability insurance does not protect against claims related to professional or business practices — those would be covered by either E&O insurance or professional liability insurance.

Who needs E&O insurance?

Any business or professional that provides advice or professional services needs E&O insurance. Some states and licensing boards require certain types of businesses to have E&O insurance coverage. For example, the Financial Industry Regulatory Authority requires professionals, such as insurance brokers, insurance dealers, registered investment advisers and financial planners, to have this type of insurance.

Other companies and business professionals who provide advice or a service, such as writers, real estate agents, accountants and advertising firms, would also benefit from having E&O insurance as it would protect them against claims from clients who suffered financial harm due to the advice or services received.

For example, a client could sue a financial adviser after their investment loses money, even though the adviser explained the risks and they were within the client’s established guidelines. E&O insurance would cover the financial adviser’s legal fees, which can be high, even if a court finds in favor of the adviser.

Other areas where E&O insurance is common, if not required, are healthcare and technology businesses.

Healthcare professionals

Healthcare professionals (namely physicians) require medical malpractice insurance, which is a type of E&O insurance. This insurance protects against claims from patients who assert they were harmed by the healthcare professional’s negligence or due to treatment decisions that were intentionally harmful. The insurance also provides coverage against claims that arise from the death of a patient.

Technology professionals

Traditional liability policies do not always cover pure financial losses that result from the failure of technology. Clients can sue technology providers for losses associated with the products or services that the technology professionals provided. E&O insurance covers the legal costs in situations like those below:

• The software you sell to a client contains errors, causing the client to lose important business or customer data.
• Equipment you install for a client prevents them from receiving online orders for several days.
• The cloud-based data services you provide fail to back up a client’s critical data.
• A website you design for a client copies the layout of a competitor’s website too closely.
• You miss a deadline for developing a client’s technology or application, causing the client to lose potential or actual profits.

E&O insurance differs from cyber liability insurance, which protects your business from cyberattacks and data that is accidentally lost or leaked.

What does E&O insurance cover?

E&O insurance covers clients’ claims of wrongdoing made during the policy period. The insurance provides coverage for the following types of claims:

• Negligence
• Errors in services provided
• Omissions
• Misrepresentation
• Violation of good faith and fair dealing
• Inaccurate advice
• Work mistakes and oversights
• Undelivered services or unfinished work
• Missed deadlines

Policies are usually arranged on a claims-made basis, wherein insurance coverage applies only to claims made during the policy period. A typical E&O insurance policy protects the insured against financial loss that arises from a claim made during the policy period for a covered error, omission or inaccurate advice that takes place in the conduct of the insured’s professional business. 

Below is more information on what E&O insurance covers — and what it doesn’t.

Covered costs

Liability claims can be very expensive and could force you to close your business. Legal expenses can be in the thousands of dollars and being found legally at fault or agreeing to settle out of court may require you to pay a large sum out of pocket. E&O insurance helps you cover the following expenses.

• Attorney fees
• Court costs
• Administrative costs
• Settlements and judgments

Temporary staff and independent contractors

E&O insurance covers your business’s permanent employees and, in some cases, temporary staff and independent contractors. (Make sure to check with your insurance provider.) This is important because some businesses rely on temporary employees during busy periods. Other businesses use independent contractors to take on projects as needed. Insurance coverage is necessary for these workers, as they, too, can be negligent or make mistakes and, in turn, cause clients to sue your business.

Omissions

Omissions involve the failure to perform a task or the failure to provide information, which results in the client’s loss of money. Here are some examples of omissions:

• Failure to perform a background check
• Failure to identify a property’s commercial use, which would disqualify the client from insurance coverage after a fire
• Failure to get consent
• Failure to warn of a limitation period
• Failure to provide notification

Professional negligence

When a client hires you for your specialized skills or experience, you must meet a higher duty or standard of care than a person without these skills and knowledge. You could be held liable for professional negligence if a client experiences physical or financial harm because you didn’t abide by this higher standard. 

Here are some examples of professional negligence:

• An accountant fails to file a client’s tax return on time.
• An engineer causes a project to be delayed or incur higher costs than planned.
• An insurance professional misrepresents the type or amount of insurance coverage provided in a plan.
• A real estate agent fails to notify a buyer of a defect in the home.

Misrepresentation

Misrepresentation is when a business professional makes a false statement of a material fact that affects the client’s decision when agreeing to a contract. If the client discovers the misrepresentation, the contract can be declared void and the client can seek damages. For example, a business consultant could be charged with misrepresenting themselves to a client by stating they have experience in an industry when, in reality, they do not.

There are three types of misrepresentation:

• Innocent misrepresentation occurs when the person making a false statement of material fact was not aware the statement was untrue.
• Negligent misrepresentation occurs when the person who made the statement didn’t try to verify the statement was true before executing a contract.
• Fraudulent misrepresentation occurs when the person knew the statement was false when they made the statement or they made the statement recklessly to get the other person to enter a contract.

Exclusions

E&O insurance does not cover the following:

• Illegal acts
• Purposeful wrongdoing
• Bodily injury to employees or customers (these types of claims are covered by a general liability insurance policy)
• Property damage (these types of claims are also covered by a general liability insurance policy)
• Work-related injuries or illnesses (these types of claims are covered by a workers’ compensation insurance policy)
• Discrimination or harassment

Even if you have E&O insurance, claims made in some jurisdictions might not be covered. Check your coverage limits with your insurance provider.

Claims period

E&O insurance should apply under the following circumstances:

• The claim is filed within your policy period or the extended reporting period.
• The incident occurred on or after the retroactive date, such as incidents that occurred on or after a certain date in your policy are covered.

Most insurance policies don’t cover claims that arise from work done before the policy was put into effect.

How much does E&O insurance cost?

While rates vary widely among industries and companies, some business professionals can get an E&O insurance policy for as little as $22.50 per month.

Several factors can affect the cost of your insurance, however:

• Coverage limits: Higher coverage limits expose the insurance company to more expensive lawsuits, so the costs of the insurance premiums also increase.
• Type of business or business risk: Some types of businesses, such as law firms and medical practices, have higher risks and thus incur more lawsuits than other industries, so they’re charged higher insurance premiums.
• Location: The top insurance providers price E&O insurance according to state insurance regulations and typical loss exposures in those states.
• Claim history: If a business or product has a history of claims, there will be a higher risk of potential lawsuits for the insurance provider, increasing the costs of the E&O insurance. 

When getting quotes for E&O insurance, show insurers what you’ve done to maintain your professionalism, expertise and knowledge. Also, take the following steps to help save money on insurance costs:

• Provide your employees with training and education.
• Perform quality control on your contracting system.
• Stay in touch with customers to make sure they’re satisfied with your services and advice.

E&O insurance can protect your business from the immense costs associated with lawsuits. Protect yourself and your employees by securing E&O insurance coverage today.

Kimberlee Leonard contributed to this article.