Everything You Need to Know About Errors and Omissions Insurance

Errors and omissions insurance, also known as E&O, is one of the lesser-understood insurances, even though it is crucial for many businesses and professional individuals. Sometimes this type of insurance is required for certification and for opening your business in some states. Even when it is not mandatory, it can be an important way to protect you in the event of a lawsuit.

What Is Errors and Omissions Insurance?

E&O coverage is important for any individual or company that provides a service to a client for a fee. Errors and Omissions insurance then insures you or your company in the case you are sued by your client who claims that you failed (omitted) to provide a service- or made errors in the service you provided. Typically, this is the case if your client had a financial loss as a result of your services or efforts. If your client sues you- even if unsuccessful- costs could be detrimental; so errors and omissions insurance covers things from defense costs and judgments, to damages and settlements.

There are a few types of errors and omissions insurance, most well-known are malpractice insurance and liability insurance. Malpractice insurance, for example, is the E&O coverage usually chosen by dentists, doctors, surgeons, chiropractors and other similar professionals. Accountants, engineers, attorneys, architects, and other professionals may choose professional liability insurance.

It’s important to remember that errors and omissions insurance does not cover all potential liabilities and will not cover criminal prosecution. Any company breaking the law can still face full criminal and civil proceedings.  Even the best E&O coverage will not protect you from every eventuality; Although it will protect you from the most common situations arising from a negligence claim. It will definitely bring you peace of mind and offer you an option if you do find yourself facing a negligence claim.

The Main Purpose for Errors and Omissions Insurance

Errors and omissions insurance protects companies and professionals in the event of a lawsuit. Any legal action can be costly for a professional and even a frivolous claim can cost tens of thousands of dollars or more in just defense costs. In some cases, these expenses can be enough to close a firm or small company or create severe financial distress for an individual professional.

All professionals may make errors in the line of their work and clients may perceive an unsatisfactory outcome, even if a professional does everything right. In these situations, a legal claim is a common result because the financial impact of a mistake or perceived can be significant. Since defense costs and settlements in these claims can be so costly, errors and omissions insurance may be needed to protect companies, firms, and individuals.

Larger companies also invest in errors and omissions coverage because settlements made against a larger company can have a long-term impact on financial success. Larger companies’ financial position may suggest the ability to pay larger settlements, but in the case of frivolous lawsuits, these companies may have concerns about paying such large settlements. This then leads to a longer process and more costs.

The History of Errors and Omissions Insurance

By the 1600s, marine insurance and other forms of business insurance were quite popular in England, especially in London.  In the 1680s, Edward Lloyd opened a coffee house in London. Investors would arrived at the coffee house to underwrite ship travel and business, and it became an informal meeting place for those in the shipping industry. By 1774, the coffee house group had become what was called the “Society of Lloyd’s,” and eventually become known as Lloyd’s of London, the modern name of a well-known insurance market. This was the start of the business insurance field that led to E&O Insurance.

In the United States, insurance became important as merchants grew in power. Insuring shipment by water and rail became important.  In 1886, the first employer liability insurance was offered and in 1889, the first public liability insurance was offered.

In the 1970s, many states enacted caps on noneconomic damages for medical malpractice lawsuits, in an attempt to curb frivolous lawsuits and to limit the costs of insurance for medical practitioners. In California, for example, these caps were set at $250,000. By the 1990s and 2000s, some states had declared their noneconomic caps for damages as unconstitutional or had reviewed the caps already in place.

What You Need to Know Before Getting Errors and Omissions Insurance

If you are considering E&O insurance, keep in mind that each policy is different. For example, while both an engineer and a doctor should have an E&O policy, the protection they need will be different. Even two doctors may have very different policies to cover their specific risks. Some policies exclude punitive damages for example and some will include defense expenses, within a specific limit.

Most errors and omissions insurance policies are written to require any claims to be made within a policy period. The retroactive date on these policies is crucial, because any activity made before this date, which results in a lawsuit, will not be covered. You will want to keep this in mind and look for a retroactive date that goes back quite a bit since it can take some time for a lawsuit to be filed after an event. When it comes to errors and omissions insurance, the statute of limitations is important to consider as well. In general, you will want to consider the statute of limitations for negligence claims in your area and ensure the retroactive date on your policy covers as much of that time frame as possible.

The Cost of Errors and Omissions Insurance

Just as the terms of E&O policies vary widely, the costs will vary widely, as well. Costs will depend on:

    • Your business location. Some states have very strict tort laws and limited statutes of limitations, intended to limit frivolous lawsuits. Other states have laws which make it easier to file claims and to pursue economic and non-economic damages in negligence suits. These laws can determine insurance costs.
    • Your business class. Some businesses are more protected from lawsuits than others and if you face a lower risk you may end up paying less in insurance.
      Your claims experience. If you have multiple claims against you or against your company, you may face higher insurance costs. Depending on the situation, you may even have a challenge getting coverage.
    • The claims expectations of your industry. Some industries simply face higher legal risks than others. The risks of a web designer being sued, for example, are much less than that of a neurosurgeon. The patient costs and the pain experienced after an unsuccessful operation are simply more significant than the losses a client may face with a poorly designed website.
    • Your own actions. If you have taken steps to mitigate claims and reduce your risk of legal action, you may qualify for lower rates. For example, if you use strong contracts with every client, have good communications processes in place, have a strict compliance process, and good quality control procedures,  you may pose a smaller risk for the insurance carrier and this may result in lower insurance costs. If you have any documented processes and procedures to limit your lawsuit risk, be sure to share these with your insurer to see if it reduces your coverage costs.
  • Your insurance company. Insurance companies set their rates for E&O insurance differently, and even if an insurer offers a competitive rate for one type of insurance it does not mean they will offer the lowest rate for errors and omissions coverage. Always compare coverage, terms, and costs.

Do I Need Errors and Omissions Insurance?

If you are a doctor, engineer, surgeon, broker, accountant, architect or engineer, you likely already know you need errors and omissions coverage. Any mistakes or perceived mistakes made in your line of work can be costly to your clients and therefore mean you have an E&O exposure.

Similarly, if you offer any service for payment in your line of work, you may need errors and omissions coverage. Consider what services you offer your clients and what your clients have potential to lose financially, in the event of an error. If they face a financial loss, you may be held liable. Errors and omissions insurance, therefore, may additionally be a good option for:

    • Advertising professionals and agencies. If an advertisement or campaign is delayed, published with the wrong information, or otherwise includes an error which results in financial losses, it can result in a legal claim.
    • Transportation, fulfillment, and shipping companies. These companies have an E&O exposure because late, damaged, delayed or misdirected shipments can cost clients significant money.
    • Commercial printers. Any items printed incorrectly, or with the wrong information, can cost clients money. This may be in the form of lost opportunity costs or in additional print costs.
    • Designers. Clients who are unhappy with the final result can launch a legal claim, and E&O insurance can protect designers from this.
    • Fashion designers and professionals. Designs can be found to have errors or even to cause injury and designers can be found liable if clients are unhappy with the final results.
    • Makeup artists, tattoo artists, and aesthetics professionals. Aesthetics professionals face legal claims if a client is injured or harmed during a treatment. In some cases, claims have been filed because a client was not happy with the look.
    • Wedding planners. If a wedding is planned in the wrong venue, on the wrong date, or really if anything else goes wrong, the bride may become very upset and the error may end up costing significant amounts to fix. Today, weddings can cost tens of thousands of dollars or more, so E&O coverage is a good investment for anyone offering these services.
    • Web hosting and design companies. A lawsuit can be filed against a web hosting company even if an outage occurred that was not the fault of a web hosting service. For design companies, downtime can cost clients thousands of dollars or more in lost sales and opportunities, so insurance is important for these professionals.
    • Coaches and trainers. Personal trainers, life coaches, success coaches, and all professionals in this category are often hired to produce specific results. If their guidance fails to produce a client’s desired results or results in injury, a lawsuit can result.
    • Consultants. The advice consultants offer may fail to produce the outcome a client desires and in these cases, errors and omissions coverage can be important.
      Writers and editors. Small errors made in marketing copy, white papers, business copy and other materials developed for clients can be costly for those clients.  Writers may also find themselves facing libel or even plagiarism allegations and lawsuits, so errors and omissions coverage can be important in those cases.
  • Translators. Translations of legal documents, business contracts, marketing materials, and immigration documents are important. Even minor mistakes on these forms can result on legal losses, business loss, rejected immigration petitions, and other expensive outcomes for clients.

A general liability policy usually does not cover all the losses a professional or business may face a lawsuit. A client who files a lawsuit may allege not only financial losses but also intangible losses. They may claim loss of reputation, for example, or loss of future sales and opportunities. This can increase the eventual potential settlement or judgment, and may increase defense costs as well.  E&O insurance can cover these risks not covered by a general liability policy.

You may also need Errors and Omissions insurance if your client contract or business contract requires it. Many agreements include a clause requiring you to have errors and omissions coverage to protect the client in case anything goes wrong. If you have signed such a document or are about to, it is important to add E&O coverage to your insurance portfolio.

The Market and E&O Coverage

The reality is that errors and omissions insurance importance is growing for companies in today’s competitive marketplace. In fact, a 2010 survey conducted by Insurance Journal found that 14.4% of responding agencies would not hire an otherwise qualified candidate if he or she had had an E&O claim filed against them. An additional 64.2% of respondents said they may perhaps not hire such a candidate.

According to Insurance Journal, E&O claims appear to be increasing. The company reported that in 2009 about 56.3% of survey respondents claimed to have never been sued for an E&O issue while in 2010 only 48.1% could make that claim. Unfortunately, professionals and companies can do everything right and still end up facing legal action. A small mistake made by one member of a team can result in an unhappy client threatening to sue. Even when no mistake occurs, a client may not take responsibility for their own actions and blame the company or professional, even if it was not of their fault. In these cases, having E&O coverage can be invaluable for the business or individual being sued.

Other factors are affecting the frequency of E&O claims as well. As companies reduce staff or seek to reduce costs, increasing pressure and workloads may cause increase stress and lead to errors. In addition to these internal factors, external factors and the inter-reliance of companies can lead to claims. For example, the trucking industry is facing a labor shortage and some delays are occurring due to fewer truckers on the roads. If a fulfillment company is relying on truck companies to ship a product, they may find themselves facing unhappy clients, by no fault of their own, if that truck company cannot make shipments on time. Even weather and other external factors beyond a company’s control can affect client’s experience. For example, clients may hold a web hosting company liable for their site’s downtime, even if a storm, natural disaster, or a hacker had caused that downtime.

Professionals and companies may not be able to prevent the filing of a negligence claim, but having insurance can help offset some of the financial costs, including the defense expenses. If you’d like to learn more about E&O insurance or the insurance industry, visit the StateCE blog or contact StateCE for more information about insurance continuing education courses.