First, some states require you to have E & O insurance. Next, some clients won’t use your services and others won’t recommend your services if you do not have E & O insurance. Last, but not least, unless you are willing to risk losing everything you own, you should have E & O insurance to protect you and your family’s future.
There is a saying in almost every profession that you are either someone who has already been involved in a claim or lawsuit, or you are someone who will be. We live in a litigious society and even frivolous claims can cost a lot of time and money to defend. E & O insurance offers you protection and peace of mind at a fraction of the cost that you would have to pay to defend a claim or lawsuit.
There is no data in the insurance industry to support this. The general public assumes that all professionals are responsible for their mistakes since they are professionals. Most members of the public also assume that a professional has insurance to cover any mistakes they might make or damages they might cause. Therefore, the reality is that working without E & O insurance is like walking a tightrope without a net.
This can vary from state to state based either on what the state mandated requirements for E & O are, if any, or the differences in value in each state upon which damages might be claimed. For example, if you make a mistake with a value equal to 10% the average price for a single family home on a job in Ohio, your claim might be for $25,000 to $30,000. The same mistake also equal to 10% of the value of a single family home in California could result in a claim for $100,000 to $150,000. Ask your insurance agent/broker what is right for you given where you do business and what kind of business you conduct.
Your deductible should represent the amount you can afford to spend to defend or settle a minor claim occurring once per year. As a business owner, your goal is to handle any issues with a customer in the most efficient and effective way possible. The more you can afford to pay (the higher your deductible), the lower your premium in most cases. Insurance companies like higher deductibles because statistics show the more you stand to lose if you make a mistake, the more careful you are not to make mistakes.
Insurance is a cyclical, profit driven business and some insurance carriers go in and out of certain markets (states or professions) based on the current business cycle. This may allow them to charge less than other carriers who are always in the market. It is in your best interest to work with an insurance company that has longevity and staying power. Some carriers who are new to the market also “cherry pick” clean business from other carriers by offering very low premiums to experienced professionals with no claims history. Unfortunately, once you have a claim, these carriers are the most likely to cancel you because they don’t really have sufficient experience to handle and pay claims.
Let’s turn that question around: Why should someone hire you instead of the guy down the street who charges less? In the insurance industry, price is just one piece of a complicated risk management puzzle. You want to be insured by an insurance carrier who has claims experience with your profession and didn’t just start insuring your profession recently. You want to buy coverage through an agent who knows you, your family, your business and the risks you face. In other words, you should do business with a company as professional and competent as you are. Typically, the company offering the cheapest policy is not going to be the best, so always remember that you get what you pay for.
A claims made policy provides coverage for claims only when both the alleged incident and the resulting claim happen during the period the policy is in force. Claims made policies provide coverage so long as the insured continues to pay premiums for the initial policy and any subsequent renewals. Each succeeding year the policy is continuously renewed, the “coverage period” is extended. Once premiums stop and the policy ends, the coverage stops. Claims made to the insurance company after the coverage period ends will not be covered, even if the alleged incident occurred while the policy was in force. There are some exceptions to this called “extended reporting” or “tail coverage.”
An occurrence policy protects you from any covered incident that “occurs” during the policy period, regardless of when a claim is filed. An occurrence policy will respond to claims that come in – even after the policy has been canceled – so long as the incident occurred during the period in which coverage was in force. In effect, an occurrence policy offers permanent coverage for incidents that occur during the policy period.
As long as you maintain your Prior Acts Coverage (retro date), even if you switch carriers, any work you have performed from that date forward will be covered, subject to specific policy definitions, limitations or exclusions. Beware of the carrier who offers you a low premium in exchange for accepting coverage called “retro inception.” This means you are losing your prior acts coverage and this could result in you having to pay a claim out of your pocket based on older work done.
Insurance companies are for-profit entities and base the premium they charge on the risk you represent. When you have even a single claim, your risk profile changes and the insurance company may charge you more for the additional risk you represent, even if the claim turns out to be frivolous. Keep in mind the insurance company often provides you with $1 million of coverage for just a few thousand dollars, so even the first claim increases the risk you represent to the carrier.
This is a great question for every small business, and the truth is that there is no way to avoid claims entirely. Instead, you should be focusing on ways to reduce your daily operational risks. The goal of every business should be to take only reasonable risk in providing goods or services to your customers. Here are a few ideas on how to reduce your risk and to build a defensible position if a claim is ever filed against you.
Be thorough, detailed, and professional; don’t take an assignment that is beyond your level of expertise; check your work; do all your own research; and confirm all the information you are relying on. If you get a call from a client who has any questions or issues, call that client back immediately. Nothing irritates a client more than being ignored, and irritated clients file claims and lawsuits. In other words, be smart, be careful, and treat your customers like you would want to be treated. It’s much less likely a customer will file a claim if they view you as a competent professional who cares about their needs and concerns.