Errors and omissions (E&O) insurance, sometimes referred to as professional liability insurance, is a specialized form of liability coverage designed to protect businesses from claims arising due to mistakes or errors in the professional services they provide. This type of insurance is particularly crucial for professionals and service-oriented businesses where accuracy and timeliness are paramount.
The coverage extends to various professional services, encompassing scenarios where services are delivered late, not delivered at all, or are found to be inaccurate. E&O insurance steps in to provide financial protection by covering legal defense costs, settlements, and judgments that may arise from such claims.
For instance, if a consultant offers advice that leads to financial losses for a client, or a software developer delivers a product with coding errors causing operational issues for the client, E&O insurance would come into play to help mitigate the financial consequences of these errors.
It’s important to note that errors and omissions insurance is distinct from general liability insurance, which primarily covers bodily injury, property damage, and personal injury claims. E&O insurance is tailored to address the specific risks associated with professional services, providing a safety net for businesses in professions where mistakes could lead to legal action and financial repercussions.
Examples of E&O Insurance Claims
- A real estate agent fails to disclose key information about a home.
- A tax preparer makes an error that results in a penalty.
- A contractor fails to complete a project on time.
- A marketing consultant provides advice that results in lost revenue.
- A public relations firm’s strategy results in a PR disaster.
These examples illustrate scenarios where errors or omissions in professional services could lead to financial losses for clients, prompting them to file claims against the respective businesses. E&O insurance would come into play in these situations to provide coverage for legal expenses, settlements, or judgments arising from such claims.
What Errors and Omissions Insurance Covers
Errors and omissions insurance provides coverage for various types of mistakes and oversights in professional work. The coverage extends to include:
- Misrepresentation: Encompassing false or misleading statements, such as a real estate agent providing misleading information about a property.
- Violation of Good Faith and Fair Dealing: Every contract implies a duty not to harm another party’s right to receive the benefits of the contract, and E&O insurance covers violations of this duty.
- Negligence: Failure to exercise reasonable care, such as a website designer creating a site with security gaps leading to a data breach.
- Inaccurate Advice: Covering instances where inaccurate advice or guidance causes financial harm to clients, such as a financial consultant providing advice leading to lost revenue.
In the event of an errors and omissions claim, businesses may face legal defense costs, including court expenses and attorney fees. They may also be responsible for settlements or court judgments. Additionally, businesses could encounter disciplinary hearings from regulatory or licensing boards. Defending against such claims may result in a loss of earnings due to time spent in court and on depositions. Errors and omissions insurance helps mitigate these financial burdens by covering associated costs.
What Errors and Omissions Insurance Does Not Cover
Errors and omissions insurance has certain exclusions and does not cover specific issues. These exclusions include:
- Employment Practices: Claims related to wrongful termination or harassment are not covered. For these, an employment practices liability insurance policy is necessary.
- Patents and Trade Secrets: Unauthorized use of patents and trade secrets is not covered. General liability insurance may provide some protection for claims involving stolen intellectual property.
- Bodily Injury or Property Damage: Claims arising from bodily injury or property damage caused by your business are not covered by errors and omissions insurance. Business liability insurance is required for such claims.
- Work-Related Illnesses and Injuries: Issues related to work-related illnesses and injuries are covered by workers’ compensation insurance.
- Loss of Personally Identifiable Information: Errors and omissions coverage does not extend to the loss or theft of personally identifiable information. A data breach insurance policy is necessary to cover these costs.
Who Should Consider E&O Insurance?
Errors and omissions insurance may be mandatory in specific states or as required by licensing boards. For instance, in more than 10 states, real estate agents must provide evidence of errors and omissions coverage to obtain their licenses.
Beyond real estate agents, the following businesses can benefit from professional liability insurance:
- Accountants
- Advertising agencies
- Graphic designers
- Interior decorators
- Management and business consultants
- Tax preparers
- Technology professionals
- Travel agents
Is Errors and Omissions Insurance Compulsory?
Certain professions, including attorneys, medical practitioners, contractors, and real estate agents, may be obligated to have E&O insurance. Requirements vary based on the state and the specific profession.
Even if your state doesn’t mandate E&O insurance, it’s advisable to consider it. Without this coverage, you may be exposed to substantial out-of-pocket expenses in the event of a lawsuit arising from professional mistakes.
How Much Does Errors and Omissions Insurance Cost?
On average, errors and omissions insurance cost is around $61 per month, totaling $735 annually. However, the precise cost varies depending on the profession and associated risks.
Approximately 32% of small business owners pay less than $50 per month, while 39% fall within the $50 to $100 per month range, and 29% pay more than $100 per month.
Monthly E&O Insurance Costs by Profession
- Building designer: $142
- Media and advertising: $72
- IT/technology: $67
- Real estate: $57
- Consulting: $56
- Finance and accounting: $42
- Insurance professionals: $42
- Professional services: $42
The factors influencing the cost of errors and omissions insurance include:
- Business size and the number of employees.
- Business revenue.
- Industry type and associated risks.
- Business location and state.
- Past claims history of the business.
- The chosen E&O coverage limits.
How Does Technology Errors and Omissions Insurance Function?
Technology errors and omissions insurance (tech E&O insurance) serves to cover legal fees and other associated costs arising from claims made against individuals or businesses operating in the technology sector. This type of insurance is specifically designed to address the unique risks faced by technology professionals.
Instances where technology E&O insurance proves valuable include:
- Software Glitches: If a software program you sold has glitches that result in the corruption of a client’s billing data.
- Malfunctioning Equipment: In the event that the equipment you installed malfunctions, leading to a customer’s inability to receive orders.
- Website Similarity: If a website you created bears a striking resemblance to a competitor’s website, leading to potential legal claims.
- Missed Deadlines: Failure to meet crucial deadlines during the development of a new technology product, resulting in a loss of revenue.
- Product Impact: Selling a product to a client that causes their system to crash.
Technology professionals who may benefit from technology E&O insurance include:
- Businesses involved in the production of electronic components for computers.
- Computer consultants.
- Internet service providers.
- IT contractors.
- Software developers.
- Website developers.
Distinguishing Between Technology E&O Insurance and Cyber Liability Insurance
While both technology errors and omissions (E&O) insurance and cyber liability insurance are essential for safeguarding technology businesses, they address distinct aspects of risk. Here’s a breakdown of their differences:
Cyber Liability Insurance:
- Coverage Focus: Primarily addresses incidents of cyberattacks and data breaches.
- Example Scenario: If private customer information is stolen from your company’s database due to a cyberattack, cyber liability insurance will assist in covering the associated costs.
- Scope: Protects against losses resulting from unauthorized access, hacking, or theft of sensitive data.
Technology Errors and Omissions (E&O) Insurance:
- Coverage Focus: Encompasses negligence, product failures, errors, and omissions made by your technology company.
- Example Scenario: If your technology product or service experiences failures, and a customer files a claim alleging negligence, technology E&O insurance will help cover the costs.
- Scope: Extends coverage to instances where your company is directly involved in errors, omissions, or product-related issues that affect customers.
In summary, technology E&O insurance comes into play when your company is implicated in errors or failures affecting a customer, whereas cyber liability insurance is designed to address external cyber threats leading to data breaches and attacks on your business’s digital assets. Both forms of insurance play crucial roles in providing comprehensive protection for technology businesses.
Common Questions About Errors and Omissions Insurance:
Q1: Is professional indemnity insurance synonymous with errors and omissions insurance?
Professional indemnity insurance, also known as errors and omissions insurance, refers to the same type of coverage. This form of small business insurance provides protection by covering legal costs associated with claims arising from professional mistakes, such as providing inaccurate advice, even when the claims lack merit. Another term often used interchangeably for this business insurance is professional liability insurance.
Q2: What happens if my errors and omissions policy lapses?
Should your errors and omissions policy expire, any claims arising from professional mistakes made after the policy’s expiration date might not be covered. Consequently, you would be responsible for covering legal expenses, settlements, or judgments from your own resources.
Certain E&O policies offer an extended reporting period, which includes coverage for claims filed within a specified timeframe after the policy lapses, typically ranging from 30 to 60 days. However, claims filed beyond this extended reporting period would not be covered.
Q3: What is covered by errors and omissions insurance in the real estate industry?
Errors and omissions insurance, a form of small business insurance, provides coverage for claims related to professional mistakes made by real estate agents and brokers, irrespective of the claim’s merit. This encompasses allegations of negligence and failure to fulfill promised services.
For instance, if a client alleges that your real estate business neglected to disclose termite damage, leading to a lawsuit, your E&O insurance policy would handle the associated legal costs.
Additional Coverages to Consider:
Business Owners Insurance (BOP)
Providing comprehensive coverage, BOP is designed to safeguard your business against various risks, including property damage, liability, and business interruption. It offers a holistic approach to business protection.
General Liability Insurance
Essential for trucking operations, general liability insurance covers bodily injury, property damage, and related liabilities. It shields your business from legal and financial risks associated with accidents or incidents involving your vehicles.
Commercial Umbrella Insurance
Offering an additional layer of liability protection beyond primary coverage limits, commercial umbrella insurance acts as a supplementary safeguard against catastrophic losses. It provides heightened security for unforeseen events.
Workers Compensation Insurance
Addressing the well-being of your workforce, workers compensation insurance ensures coverage for medical expenses and lost wages in the event of work-related injuries or illnesses. It is a crucial component for businesses with employees.
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