What is E&O Insurance?
What are E&o insurance and its average cost? E&O insurance, or Errors & Omissions Insurance, falls under Professional Liability insurance? It aims to protect businesses and employees against inadequate or negligent work claims.
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What Does An E&O Insurance Policy Cover and What is its Average Cost?
An Errors & Omissions policy covers expenses related to claims regarding financial losses and damages due to clerical. Or even administrative mistakes and faulty or wrong advice. This is as deemed by the aggrieved party. An E&O insurance policy would cover finding a suitable lawyer for the insured. This would also pay the cost of hiring lawyers and paying for damages. This is in case the court finds your company liable for the financial losses of your client, an out-of-court settlement, court expenses, and other relevant costs arising from a lawsuit.
Who Needs E&O Insurance?
Any business or individual contractor whose services involve providing advice, or clerical and administrative duties, would need an average cost of E&O insurance. This protects them from unexpected financial burdens brought about by claims against the company for bad advice, misinformation, and/or negligent work. Let’s look at the following examples and why having an Errors & Omissions policy would be advantageous.
Some expectations must be met when people go to insurance agents for advice. Insurance agents are expected to be excellent at risk analysis to make client recommendations. When risk analysis is not done correctly, there is a big possibility that the policy coverage will not be enough. This is when claims are made against the client. The client ends up suffering the financial losses that the insurance policy was supposed to be protecting them from in the first place. The transfer of information from the client to the insurer is also significant. A simple number mistake or failure to provide important information can mean either inadequate coverage or the denial of a claim.
IT Companies / Business Owners or Freelancers
Many businesses rely on IT companies for their website, online applications, and upkeep. When businesses lose income because the website is down or the application does not function, owners naturally want to find the problem. A different scenario need not necessarily involve an “error” on the part of the IT company. It may be as simple as a delay in the project. This leads to a missed deadline and therefore leaves the client unable to fulfill specific promises to its clients. This is damaging its reputation and credibility as a company.
Another example is the loss of sales from an e-commerce site. This is because the server was down for 24 or even 48 hours. Even worse, if the system is hacked and proprietary or privileged information is compromised.
Branding / Marketing Companies
A business may seek advice or get the service of a marketing company to grow the business and increase sales. Suppose agreed results are not met, or the business owner is sued for copying a patented logo/trademark. The client will probably file a claim against the marketing company.
Real Estate Agents
Real estate will always involve vast amounts of money. And buyers rely on their real estate agents not just for advice but for complete and accurate information. So, when first-time homeowners or property investors find that their decision to purchase a property was based on incomplete or false information, and then realize that they could have either bought the property at a much lower price or that they wouldn’t have bought the property altogether, because they would be looking at a decrease in the market value of the property, then you know what comes next— a lawsuit.
Wedding Planners / Videographers
Getting married is one of the most important and memorable milestones in a person’s life. This is why couples are willing to spend extra money to hire wedding planners and videographers. They want their special day to be stress-free and perfect. They also want every special moment captured as a keepsake. So, suppose the wedding planner somehow gives information or makes an error that causes the wedding to be chaotic (i.e., not enough parking space at the reception, decor and seating not implemented as discussed, the vegan-friendly food was not served when half the guestlist and the celebrants themselves are vegan, etc.). In that case, the married couple might sue the company for damages. The same goes when the videographer, for whatever unfortunate reason, fails to “record” an essential part of the event. Or worse, the entire event.
What’s important to remember is that claims, whether valid or not, will always involve costs. It is, therefore, crucial that you assess your own business and the kind of services you provide, and the nature and size of your client’s businesses to foresee any possible incidents that might result in claims due to a client’s financial losses from work or service they feel was inadequate or negligent.
Is E&O Insurance a Legal Requirement?
Not all types of businesses are legally required to have Errors & Omissions insurance. However, some professionals are required by their licensing or regulatory boards to have it. In some cases, clients would require the service provider to have it, which would be stipulated in the contract.
What are the Risks of Not Having E&O Insurance?
When an independent contractor or a business is sued for damages and financial losses by their client, there is no telling how the story ends. Well, and good if the client agrees to an out-of-court settlement you can afford. But what if the court renders a massive judgment? Reasonable or not, a judgment is a judgment, and it has to be adhered to. The judgment need not even hundreds of thousands. When faced with a judgment to settle, the ultimate question is, are you or your business liquid enough to pay for everything? And if not, will selling your assets be enough? Because if the answer is ‘NO,’ you might have to declare bankruptcy. Having Errors & Omissions insurance serves as a ‘cushion’ in situations like this, where the insurance provider covers all or part of the costs relating to the claim— depending on your policy’s coverage, limits, and deductibles.
When you don’t have insurance that will help you find the right attorney for the job or don’t have the funds to hire an attorney in the first place, you might find yourself having to represent yourself. Lawyers, especially those with lots of experience and an excellent track record, can be costly—but for good reason. Unless you are an experienced attorney in this field, you might realize this is the worst business decision ever. Well, next to not getting yourself an Errors & Omissions insurance, that is.
Choosing the right attorney for the Job
Having Errors & Omissions insurance assures you that your insurer will provide you with an attorney if your client files a claim against your business. Valid or not, a claim or a lawsuit immediately equates to expenses. Having E&O insurance means you won’t have to worry about choosing the right attorney. It means you won’t have to wonder whether your attorney has enough experience and capability to win your case (or at least minimize the costs). After all, your insurer will probably be shouldering most, if not all, of the expenses—this guarantees they’ll give you a more-than-just-competent lawyer.
How Much Does an E&O Insurance Cost?
Errors and Omissions Insurance would cost around $900 to about $2,700 annually. As with other forms of insurance, the cost of an E&O policy greatly depends on several factors, such as the following:
- The type and size of the business to be covered.
- The location of the business.
- The claims history — i.e., how often claims were made and the size of the claims made in the past.
In general, the insurance cost goes up as the risk increases. So, if your business has a history of being sued for neglect or providing erroneous information to your clients, resulting in loss of income, it wouldn’t be surprising at all if your E&O policy would be more expensive as compared to the policy of another business similar in nature and size to yours (if the other company being compared to has no history of claims). But more important is to look at the benefits you get from this expense. Is the amount you will have to pay regularly worth the benefits you get from having E&O insurance?
What are the Benefits of Having E&O Insurance and Knowing the Average Cost of it?
The assurance of legal representation
Being sued is stressful enough. What more when you don’t have the means to hire your legal team to defend you? An E&O policy ensures you can access competent legal advice without worrying about fees or your attorney’s track record.
Preservation of assets
When claims reach amounts far beyond the business’ available funds, one might be forced to liquidate assets even when this would mean even more significant losses for the company. An E&O policy is supposed to shield the business from this type of stress, as when there is ample coverage, paying for costs related to a lawsuit would be shouldered by the insurer.
Trust-building with clients
Knowing that you are protected by an Errors & Omissions policy lets your clients know that you are professional enough to take responsibility for any mistakes you might make. They will appreciate that you are not only protecting yourself from unexpected financial blows that might result from unwanted harm done to your client’s company due to errors or negligence committed by your company but also making sure that they are compensated for any harm or damage their business.
Less stress and financial uncertainty
Nobody knows how much it would cost a business once a court passes on a judgment. But especially for clients with big businesses, costs can easily reach hundreds of thousands or even millions— and in the worst-case scenario, a company could end up filing for bankruptcy. With an E&O policy in place, there is less of this uncertainty. It might mean additional expenses for your company, but this is calculated and is an amount your company expects to pay regularly. Of course, it is also an amount you know your company can afford. At the same time, should any of your employees commit an error that causes you to give your clients bad advice, you know that legal advice is readily accessible anytime you need it.
In conclusion, if you have a business that provides service, get yourself an E&O policy when:
- You know that clerical or administrative errors and bad advice can cost your clients financial losses and damage their credibility or reputation.
- You know that advice from your company can be misconstrued as poor advice that harms your client’s business. This is regardless of whether it is true or not.
- You know that your clients might end up suing your company if your company gives them poor advice or incomplete/incorrect information that causes them to make poor business decisions.
- If a client files a claim against your company, you want less financial uncertainty.
- You want the peace of mind that you will have access to a competent attorney with a good track record. Whether valid or baseless, this is any time a client sues your company.
- You want the peace of mind that you have a financial cushion in place if a client makes a huge claim against your company for an error that caused substantial financial losses to their business.
If you have any questions or suggestions, please call or message us here at Team AIS in Denver, CO, and we’ll help you get sorted out!