As a business professional, you are responsible for the advice and services you provide to clients. Clients who believe they have been financially harmed by your advice can bring a legal claim against you and your firm. Under these circumstances, errors and omissions insurance can help protect you against legal claims of inadequate work or negligence.
Errors and omissions insurance – which is a form of professional liability insurance – provides your business, employees and business professionals with coverage against lawsuits for clients’ claims of inadequate work or negligent action resulting from your professional services. The businesses’ insurance policy will pay your legal fees, court costs and any settlements up to the amount specified in your policy.
General liability insurance provides coverage against claims that can arise when a third party is injured or property is accidentally damaged on your premises (e.g., a customer trips on the carpet in your store and hurts their arm). It covers damages that an employee causes on the premises of the third party. However, general liability insurance does not provide protection against claims that relate to professional or business practices – this would be covered by either errors and omissions insurance or professional liability insurance.
Any business or professional that provides advice or professional services requires errors and omissions insurance. Some states and licensing boards require some types of businesses to have errors and omissions 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 (e.g., writers, real estate agents, accountants, advertising firms) would also benefit from having errors and omissions insurance, which 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 advisor after their investment loses money, even though the advisor explained the risks and they were within the client’s established guidelines. Errors and omissions insurance covers the legal fees, which can be high, even if a court finds in favor of the financial advisor.
Any business or professional that provides advice or professional services requires errors and omissions insurance.
Healthcare professionals (namely, physicians) require medical malpractice insurance, which is a type of errors and omissions insurance. This insurance provides protection against claims from patients who state they were harmed by the 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.
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 provide. Errors and omissions insurance covers the legal costs involving situations such as the following:
Errors and omissions insurance differs from cyber-liability insurance, which protects your business from cyberattacks and data that is accidentally lost or leaked.
Errors and omissions insurance provides coverage for these types of claims:
Errors and omissions insurance covers clients’ claims of wrongdoing made during the policy period. Policies are usually arranged on a claims-made basis, wherein insurance coverage applies only to claims that are made during the policy period. A typical errors and omissions 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.
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. Errors and omissions insurance helps you cover the following expenses:
Errors and omissions 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 involve the failure to perform a task, or the failure to provide information, that would result in the client’s loss of money. Here are some examples of omissions:
When a client hires you for your specialized skills or experience, you must meet a higher duty or standard of care. You could be held liable for professional negligence if a client experiences physical or financial harm because you did not abide by this higher standard. As a professional, you must meet a higher duty or standard of care than a person without these skills and knowledge. Here are some examples of professional negligence:
You could be held liable for professional negligence if a client experiences physical or financial harm because you did not abide by a higher standard for specialized skills.
Misrepresentation is when the 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:
Errors and omissions insurance does not cover the following:
Even if you have insurance, claims made in some jurisdictions might not be covered. Check your coverage limits with your insurance provider.
Errors and omissions insurance covers the following circumstances:
Most insurance policies do not cover claims that arise from work done before the policy was put into force.
Several factors can affect the cost of your professional liability insurance:
When getting quotes for errors and omissions insurance, show what you have done to maintain your professionalism, expertise and knowledge of your business. Take the following steps to help reduce your insurance costs:
Errors and omissions insurance can protect your business from the immense costs associated with lawsuits. Protect yourself and your employees by securing errors and omissions insurance coverage.