Understanding E & O Insurance

April 28, 2017

What is E&O Insurance?

Errors and Omissions (E&O) insurance covers your company, or you individually, in the event a client seeks to be paid damages for a service you provided, or failed to provide, that did not have the expected or promised results. Doctors call this “malpractice insurance” and lawyers call it “professional liability insurance.” Whatever you call it, it covers you for errors (or omissions) you have made, or that your client perceives you have made, when performing a service for them.

Most of these policies cover judgments, settlements and defense costs. Even if the allegations are found to be groundless, thousands of dollars may be needed to defend the lawsuit. They can bankrupt a smaller company or individual and have a lasting effect on the bottom line of even much larger companies. In short, E&O coverage provides protection for you in the event an error or omission on your part causes a financial loss for your client.

Who Needs E&O Insurance?

Obviously, professionals like doctors, lawyers, accountants, architects, or engineers need E&O insurance. However, companies like home inspection firms, advertising agencies, commercial printers, appraisal companies, Web hosting companies, real estate brokerages, and even wedding planners can benefit from this type of coverage as well.

If you are in the business of providing a service to your client for a fee, you are at risk for errors and omissions exposure. You may want to consider what might happen if the service is not done correctly or on time, and consequently costs your client money or harms their reputation.

Why Do I and/or My Company Need Coverage?

To put it very simply, everyone makes mistakes. Even with the best employees and the best risk management practices in place, mistakes will be made. No one is perfect, and as we live in a very litigious society, you may need to spend a large sum of money to defend what is clearly a frivolous claim.

For example, imagine if a wedding planner reserves the reception hall, the band, and the caterers for May 22 instead of May 29. If everyone shows up except the wedding party and guests, who pays? In addition, what about the emotional distress caused to the bride if this were to happen?

By not purchasing E&O, a company is often taking a serious financial risk. Remember the saying, “penny wise, but pound foolish”? These losses are not covered under a general liability policy ‒ and even if you are not at fault, litigation is both time consuming and expensive.

When Should I Get Insured?

As with any policy, the best time to purchase E&O coverage is before risk is taken. If know you have exposure, make E&O insurance a part of your combined business and personal insurance portfolio.

Many contracts with clients will require several types of insurance, including E&O, to be in place before you can perform services for them. In quite a few cases, having a complete insurance package may be a real selling point for your business. It gives both prospects and clients peace of mind of knowing they will be compensated if there is an error or omission.

What is Typically Covered in an E&O Policy?

There are no “standard” policy terms for E&O coverage, so each policy must be read carefully to be certain the coverage fits your exposures. An attorney, a doctor, and a real estate broker all have risk exposures, but the same policy would not work for all of them. There is no “one size fits all” E&O policy. In building the right total insurance package for you, your family, and your business, you need to work with a knowledgeable insurance professional.

What Will I Need to Provide?

An insurance company underwriter may ask for copies of contracts, a description of quality control procedures, documentation procedures, and training procedures ‒ or they may want nothing more than a completed application.

The underwriter will not only look at your experience to see if you have had claims, but they will also try to determine the reason you haven’t had claims. Is it luck, or are you doing something that prevents the claim in the first place? If you have had claims, the underwriter will want to know what steps you have taken to ensure that the same errors will not continue to occur.

What Else Do I Need to Know?

Most E&O policies are written on a “claims made” or “claims made and reported” form. This means any claims must be made or made and reported within the policy period. Most of these policies have a retroactive date (prior acts) that is very important. Claims that arise out of acts committed prior to the retroactive date will not be covered. The farther back the retroactive date, the more coverage is provided. Beware when buying an E&O policy without retroactive coverage.

Some policies also include the defense expenses within the limit of liability. Some will exclude punitive damages. The wording of these policies can vary greatly, and each policy must be read carefully to make sure the coverage fits the exposure. This is why it is very important for you to work with specialty insurance professionals that understand E&O coverage.

The cost of E&O insurance may vary greatly depending on the class of business, geographic location, and claims experience (both of the individual insured and of the industry they are in), as well as from insurance company to insurance company. For example, an insurance company that is well known for covering real estate agents may not specialize in or may not even offer coverage for business consultants.