Errors & omissions insurance
If you work in a profession with clients, no matter how diligent you are, there is a possibility that you could make a mistake. A doctor could operate on the wrong side of the body. An architect has a design that is off by inches, causing a building to have to be retrofitted. You might have policies and procedures in place to protect yourself and your organization from these errors, but what happens if you are sued? Do you have the financial resources to fight the claim in court and pay for any judgment or settlement?
What is errors and omissions insurance?
In the event a client holds you or your company responsible for a service you provided or failed to provide which did not have the desired results, the insurance policy which covers your company is called errors and omissions (E&O) insurance. Sometimes, E&O is referred to as malpractice insurance, especially when talking about the medical industry. Lawyers, engineers and accountants often refer to this type of insurance as professional liability.
An E&O policy typically covers defense costs, judgments and settlements. Even if the claim is groundless, it can take thousands of dollars to defend yourself against a lawsuit. Although many larger companies have the resources to fight legal actions, many medium to small businesses don’t have deep financial pockets. One lawsuit could bankrupt your business.
What businesses need E&O insurance?
E&O insurance steps in when an error or omission on your part causes a loss, especially a financial one, to your client. If your business provides a service to clients, you should consider what will happen if your service harms a client, either by costing them money or damaging their reputation. This might be a breach of contract, misrepresentation of services or even negligent advice.
Some professions are regulated by law to have E&O insurance. Doctors, lawyers, contractors and engineers are a few of these professions. In certain industries, E&O insurance is required by clients for big projects, such as architects who design a building. In other professions, E&O insurance is an additional policy that offers peace of mind when working with clients. Professions which can be insured include, but are not limited to:
- Cleaning and janitorial
- Auto services, such as mechanics
- Business consultants
- Event planners
- Personal trainers
- Salons and personal care, including barbers
Buying E&O insurance
Errors and omissions insurance should be purchased before you need it. If you have a risk of making an error that could potentially harm a client, you know you have exposure. You should consider making this policy part of your insurance portfolio to avoid taking the serious financial risk of facing a lawsuit. Your general liability policy does not cover mistakes. Keep in mind that errors and omissions insurance does not protect you in cases of intentional mistakes or criminal activities.
Errors and omissions insurance costs vary by policy limits and terms, profession, location and claims experience. Obviously, the amount of insurance you require factors into the cost. A surgeon might need more malpractice insurance than a dermatologist. A mechanic has different risk than an engineer. Your location may even have a lot to do with the cost of your insurance. The scope and size of your business is another factor. Smaller businesses with fewer clients probably will not pay as much as a larger company that serves thousands of customers.
The insurance underwriter is going to need to know what claims you have had. If you have no claim history, the underwriter will want to determine why. How do you prevent lawsuits against your business? Is it because you’re new to the industry, luck or having policies and procedures in place to prevent errors? If you do have a claims history, the underwriter will want to know what steps you are taking to make sure you aren’t making the same errors.
The underwriter may want detailed information about your operations and business. This helps them feel comfortable with your business to give you the best price on a policy that protects you, provides the coverage needed and gives you a competitive price. E&O insurance is very customizable, allowing you to find the policy that fits your needs.
You can often get better coverage and better rates when you describe your business accurately. For example, as an architect the risk of errors in a building design is high. If you describe your work as 100 percent architectural, you may have a high premium. However, if part of your work is in interior design or non-structural details, the risk is lower, which could reduce your premiums.
The policy period is important to your business. Claims which are made outside of the policy period are typically not covered. Sometimes, the claim has to be reported within the policy period to be covered. You can ask for a retroactive date with your policy. The farther back you can go, the more coverage you’ll have. Once you have an errors and omissions policy, it’s important to keep it active for your peace of mind. It also shows the underwriter that you are taking your risks seriously.
There are steps you can take to reduce your risk, no matter what profession you’re in:
- Have a detailed written contract that clearly identifies what will be done, what isn’t included and what your fees are
- Communicate throughout the project
- Keep expectations accurate and communicate this with the client
- Use internal and external audits to check quality and make sure all procedures are being followed
When purchasing errors and omissions insurance, it is important to understand the coverage and limitations of your policy. Some policies exclude punitive damages. Your defense expenses may have a limit. Finding an agent who understands your industry and the risks you face is essential when buying E&O insurance to make sure you have the coverage that meets the risk you face. Give yourself peace of mind by having an insurance portfolio for the exposures of your business. Don’t face a lawsuit without having an E&O policy that helps you manage the expenses.