What is E&O Insurance?
E&O insurance, also known as Errors & Omissions Insurance, falls under Professional Liability insurance. Its purpose is to protect businesses and their employees against claims of inadequate or negligent work.
What Does An E&O Policy Cover?
An Errors & Omissions policy covers expenses related to claims regarding financial losses and damages due to clerical or administrative mistakes, and faulty or bad advice, as deemed by the aggrieved party. An E&O insurance policy would cover finding a suitable lawyer for the insured and paying the cost of hiring lawyers, paying for damages should the court find 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?
In general, any business or individual contractor whose services involve providing advice, or clerical and administrative duties, would need E&O insurance to protect them from unexpected financial burdens that could be brought about by claims against the company for bad advice, misinformation, and/or negligent work. Let’s look at the following examples and why it would be advantageous to have an Errors & Omissions policy in place.
- Insurance Agents – When people go to insurance agents for advice, there are expectations that need to be met. Insurance agents are expected to be excellent at risk analysis so that they can make the right recommendations to their clients. When risk analysis is not done correctly, there is a big possibility that the coverage of the policy would not be enough when claims are made against the client, and 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 very important as a simple mistake in the numbers or the failure to provide important information can mean either inadequate coverage or the denial of a claim.
- IT Companies / IT Business Owners or Freelancers – Many businesses rely on IT companies for their website or online applications and their upkeep. When businesses lose income because the website is down or the application does not function as it should, owners would naturally want to find where the problem lies. 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 which leads to a missed deadline and therefore leaves the client unable to fulfill certain promises to its own clients— therefore damaging their reputation and credibility as a company. Another example is the loss of sales from an e-commerce site 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 with the hopes of growing the business and increasing sales. If at any point, agreed results are not met, or the business owner is sued for copying a patented logo/trademark, then the client will probably end up filing a claim against the marketing company.
- Real Estate Agents – Real estate will always involve huge amounts of money. And buyers rely on their real estate agents not just for advice, but for complete and accurate information as well. 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 the life of a person. This is why couples are willing to spend the 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, if 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 were not served when half the guestlist and the celebrants themselves are vegan, etc), the married couple might actually decide to sue the company for damages. The same goes when the videographer, for whatever unfortunate reason, fails to “record” an important 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 clients’ businesses, in order 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 and this would be stipulated in the contract.
What are the Risks of Not Having E&O Insurance?
- Bankruptcy – 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 huge judgment? Reasonable or not, a judgment is a judgment and it has to be adhered to. In fact, the judgment need not even hundreds of thousands. The ultimate question is when faced with a judgment to settle, 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’, then you might end up having to declare bankruptcy. Having an 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.
- Self-representation – 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 a great track record, can be very expensive—but for good reason. Unless you are an experienced attorney in this field yourself, you might find yourself realizing this to be the worst business decision you’ve ever made. Well, next to not getting yourself an Errors & Omissions insurance, that is.
- Choosing the right attorney for the job – Having an Errors & Omissions insurance assures you that your insurer will be providing you with an attorney in the event your client files a claim against your business. Valid or not, a claim or a lawsuit immediately equates to expenses. Having E&O insurance in place means you won’t have to worry about choosing the right attorney. It means that 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 certainly guarantees they’ll give you a more-than-just-competent lawyer.
How Much Does an E&O Insurance Cost?
On average, Errors and Omissions Insurance would cost around $900 to about $2,700 per year. 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 cost of insurance goes up as the risk goes up. 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 what’s more important is to look at the benefits you get out of this expense. Is the amount you will have to pay on a regular basis worth the benefits you get out of having E&O insurance?
What are the Benefits of Having E&O Insurance?
- The assurance of legal representation – Being sued is stressful enough. What more when you don’t have the means to hire your own legal team to defend you? Having an E&O policy in place assures you that you will have access to competent legal advice without having to worry about fees or your attorney’s track record.
- Preservation of assets – When claims reach amounts that go way beyond the business’ available funds, one might be forced to liquidate assets even when this would mean even greater losses for the company. An E&O policy in place 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 that you are also making sure that they are compensated for any harm or damage to 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 on a regular basis. 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 any of your clients bad advice, then you know that legal advice is readily accessible to you anytime you end up needing 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 are a possibility and that these errors could potentially cost your clients financial losses and/or damage to their credibility or reputation.
- You know that advice coming from your company can be misconstrued as poor advice leading to harm to your client’s business— regardless of whether it is true or not.
- You know that your clients might end up suing your company in the event your company gives them poor advice or incomplete/incorrect information that causes them to make poor business decisions.
- You want less financial uncertainty in the event a client files a claim against your company.
- You want the peace of mind that you will have access to a competent attorney with a good track record, any time a client sues your company— whether valid or baseless.
- You want the peace of mind that you have a financial cushion in place in the event a client makes a huge claim against your company for an error that caused huge financial losses to their business.
If you have any questions or suggestions, please do call us or message us and we’ll help you get sorted out!