Errors and Omissions Coverage: What Is It & How Does it Work?

Each and every project or professional relationship begins with a vision of perfection and mutually beneficial symbiotic bliss by both client and provider. However, then realities set in. Hardships arise and, more often than not, both parties are happy if the resulting product even comes close to the dream imagined at the start.

Errors and omissions insurance is the coverage your business needs when a party is not happy after professional services are rendered. Generally, and through no fault of your own, a client believes their business was adversely affected by your work. Promises were made but not fulfilled. Below, we’ll answer what is errors and omissions coverage, what it provides, and how it can limit the exposure of your business to such claims.

What Is Errors And Omissions Insurance?

For many industries where the product offered involves some kind of advisory or consulting work, there can be gaps between the provider’s offer and the customer’s expectation. In the worst instances, this can result in legal action by the customer alleging that the provider fell short of the agreement. To better understand what this policy is, it’s important to answer the question, what does Errors and Omissions insurance cover? Investopedia writes,

Errors and omissions insurance (E&O)… protects companies, their workers, and other professionals against claims of inadequate work or negligent actions…. Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract. This kind of liability insurance is generally required for professional advice-giving or service-providing business.

Often times, the term “errors and omissions insurance” (E&O) can, and will, be used interchangeably with “professional liability insurance” or “miscellaneous errors and omissions insurance” (used to a less frequent extent).

General Liability vs Professional Liability Insurance

It’s important to note the differences between general commercial liability insurance and errors and omissions insurance. While it varies by industry and product offering, some may believe that their general liability insurance will cover any claims that may arise—not the case. General liability insurance covers you in the event of:

• Physical harm or injury to people in your employ or as a result of your work
• Damage to property due to work operations

Whereas professional liability coverage pertains to the following:

• A negligence claim
• Failure to deliver promised services

Broadly, general liability covers physical harm or damage. Errors and omissions cover financial loss by a client when no one was injured or harmed.

Recommended Professions That Should Have E&O Insurance

So, who needs Errors and Omissions coverage? While this type of insurance is wildly helpful for just about any business, for service or consulting-based professions it is highly recommended and, at times, federally mandated.

The following are just a few areas where E&O coverage is recommended:

• Financial Advising
• Marketing/Branding
• Real Estate
• Technology
• Contractors/Consulting
• Architecture & Engineering

Again, these are just recommendations. Consider your business: Do you find yourself offering expert advice or professional services that otherwise clients wouldn’t be able to perform themselves? In this case, you are then responsible to hold up your end of the bargain—whatever that bargain entails. For times when your client feels cheated or their interests were misrepresented (justifiably or not) there’s E&O coverage.

The Benefits of E&O

The benefits of having an appropriate errors and omissions insurance policy are boundless, but we’ve found the following to be excellent starting ground for reason to purchase.

• Client ease – As was mentioned, some regulated industries (such as financial advising) require such insurance to be purchased. But many savvy clients will ask if your firm has an errors and omissions policy to put their minds at ease, knowing there is money available to you in the event of some unforeseen grievance made by external parties. It is a sign of professional sincerity, not a red flag.
• Financial security – Having an E&O policy is a known, smaller expense that specifically covers against the unknown, potentially much larger expense of a protracted legal battle. Being able to predict that risk secures more for your business than having unknown expenses lurking behind some corner.
• Reduced anxiety – Many businesses simply are not financially prepared in the event a judgment lands on the wrong side of the aisle. Having an E&O policy gives you relative certainty there’s a stack of cash held in escrow should you lose a case. The reduction of stress knowing this exists is often worth the additional line item.
• Inventory retention – The threat of bankruptcy in the event of a losing lawsuit is a horrendous prospect for any business owner. Either having to sell off your assets or take on a loan to satisfy court settlements or other legal fees is a death knell for most businesses. Having errors and omissions insurance will prevent this, providing you with peace of mind.

So, where do these benefits come from? What exactly is covered under an E&O insurance policy?

Scope of Coverage

Businesses should know what they are receiving for their money. It’s important to delineate what is covered, what is not, and how that’s calculated. Among others, here are some examples of what is covered under an errors and omissions policy, according to Hiscox:

• Legal defense costs – Ready legal support and liquid cash to afford that support. Many insurers will have recommended attorneys based on your individual claim.
• Alleged or actual negligence – Should a company fail to “show reasonable care” in their action that results in harm to another party, negligence can be alleged. Having an appropriate E&O policy will keep you protected in the event such a claim is made.
• Claims and damages – In the event of a court ruled settlement, many insurers will provide monetary relief up to a certain amount as prescribed by the limits in your policy. While no one wants to settle with any business party, sometimes it’s an inevitability. In these cases, the knowledge that money is there if needed is invaluable.
• Copyright infringement – Whether willfully or not, mistakes are made and copyrighted materials can be used without the permission of the owner. While always best to comply with intellectual property laws, having this is an important aspect as cover for the unavoidable human error made in all businesses. Because the truth is, it’s nearly impossible to know all copyright infringement cases before they happen.

What An E&O Policy Does NOT Cover

Of equal importance is understanding what is not covered as well. The following are potential claims that many E&O policies are not insured against:

• Fraudulent business practices
• Bodily injury or property damage
• False advertising
• Personnel disputes

These categories of coverage and non-coverage are by no means a complete list but give an idea of what you can expect your policy to do for you. For more information about your specific coverage, be sure to talk to your agent about your purchased policy.

Cost And Mitigating Claims

Now that we have an understanding of what an errors and omissions insurance policy provides, let’s talk about how that affects your business’ bottom line. So, what is the average cost of Errors and Omissions insurance and how is it determined? From the insurer side of things, it might go like this: An underwriter will analyze a number of factors in the service of drafting a policy for your business. They might ask for copies of contracts, descriptions of quality control procedures, archiving documents protocols, onboarding and training of employees, etc.

With those documents in hand, they’ll also factor in the below details to determine expenses.

• Business type
• Location
• Selected coverage limits
• Number of employees
• Years in business

An underwriter will use these areas to determine premiums, deductibles, start of coverage, potential retroactive coverage, and limits. Be on the lookout for retroactive coverage start should that be an important facet of your business.

Ways To Reduce Cost And Claim Frequency

While much of the policy’s cost is determined by the coverage you select and the underwriter’s evaluation of your business, the below are ways to drive the costs down as well as mitigate the risk of claims that may arise:

• Increasing your deductible amounts
• Having a clean, or minimal, claims history
• Discounts
• Have the following clearly delineated in a legal agreement prior to start of work for any and all clients that employ your services.
  • Statement Of Work (SOW)
  • Timeline of deliverables
  • Reasonable ROI metric expectations as mutually agreed upon by your business and the client, communicating any changes to said expectations as they arise
  • Fees

Insurance underwriters will take into account good business practices that address the reason you may not have had a large claim history. They will ask if you have procedures to avoid such exposure. And, in the event of a claim, what steps are in place so that the same error will no longer continue? Better to have these questions answered ahead of time so that your business remains an excellent candidate for a cost-efficient policy.

Protect Against the Unknown

Ultimately, scope, cost, and coverage for an errors and omissions policy is a personal decision for your business. Each company’s coverage is as specific as the DNA of the company itself. Give one of NOW Insurance’s experienced, helpful agents a call today and see what policies are available to give you the peace of mind against the unknown.

Sources:

1. Investopedia. Errors & Omissions Insurance. https://www.investopedia.com/terms/e/errors-omissions-insurance.asp
2. Hiscox. Errors & Omissions Insurance. https://www.hiscox.com/small-business-insurance/errors-and-omissions-insurance/e-and-o-coverage
3. Progressive Commercial. How much does professional liability insurance cost? https://www.progressivecommercial.com/business-insurance/professional-liability-insurance-cost/
4. Insurance Journal. The Ins and Outs of Errors and Omissions Insurance. https://www.insurancejournal.com/magazines/mag-features/2004/07/19/44745.htm
5. Insurance Journal. Agency E&O: Risk Rises Along with Rates, Cats and Customer Switching. https://www.insurancejournal.com/magazines/mag-coverstory/2019/11/04/547344.htm
6. EoforLess. The Five Benefits of Errors and Omissions Insurance. https://www.eoforless.com/the-benefits-of-errors-and-omissions-insurance/
7. National Society of Professional Engineers. Construction Contingency; Standard of Care vs. Cost of Design Errors and Omissions. https://www.nspe.org/sites/default/files/resources/pdfs/Licensure/FTC/FTC-Feb-99-ConstructionContingency.pdf