You sell expertise, advice, and professional services. However, even the best experts make mistakes, and sometimes clients claim you failed to deliver on your promises. That’s why understanding the basics of Errors & Omissions insurance is so important.
When a client believes your professional advice caused them financial harm, they can sue you. Without the right insurance coverage in place, you are on the hook for legal fees, court costs, and potential settlements.
In this article we’ll outline exactly what Errors & Omissions insurance is, why your contracts likely require it, and how it acts as a safety net for your reputation and your bottom line.
What is Errors & Omissions Insurance?
Errors and Omissions insurance (often called E&O or Professional Liability insurance) is a policy that pays for your defense if a client sues you for financial harm caused by your services. It can also cover the settlement or judgment costs if you are ultimately found liable.
An E&O claim doesn’t require dramatic negligence or intentional wrongdoing on your part. In many cases, the trigger is something as simple as a misunderstanding, an overlooked detail, or a gap between what the client expected and what they ultimately received.
When you sign a contract to provide a service, you are promising a certain standard of care. If a client believes you failed to meet that standard, then they can sue you to recover their losses – whether you actually made a mistake or not.
Errors & Omissions insurance focuses on the financial harm your service might cause to a client, which can be different from physical damage (like dropping a laptop) or bodily injury (like a client slipping in your office).
What Does Errors & Omissions Insurance Cover?
To gain a better understanding of the basics of Errors & Omissions insurance, it’s essential to know what it covers.
E&O insurance covers claims of negligence, misrepresentation, and failure to deliver services as promised. It effectively covers the “oops” moments in your professional life. Here are the primary areas where E&O steps in:
Negligence in Performing Services
This is the most common type of claim under an E&O policy. It alleges you failed to exercise reasonable care in your work, which resulted in financial harm to your client. For example, a web developer launches a site with a security flaw that leads to a data breach.
Additionally, if a business consultant advises a client to make a specific investment or operational change that results in a financial loss, then the client may sue for bad advice.
Errors in Services
This covers the actual mistakes made during your work. For instance, a tax accountant that makes a calculation error, which costs a client a significant tax penalty.
Misrepresentation of Services
Misrepresentation occurs when you oversell your capabilities or promise specific outcomes that you cannot control. That is, a client claims that your services did not meet the standards or results you promised in your contract or marketing. Even if your actual work met professional standards, the claim may focus on what was said during the sales process rather than what was written in the contract.
What is Not Covered by Errors & Omissions Insurance?
Equally important to help you a get a better understanding of the basics of Errors & Omissions insurance is to know what is not covered under a typical E&O policy.
E&O insurance is not intended to be a catch-all policy for every business risk. It does not cover criminal acts, physical injuries, or cyberattacks, for example, unless specifically endorsed.
To help ensure you have broad coverage for your business, you need to bundle E&O insurance with other policies like General Liability insurance and Cyber Insurance.
Here are some standard exclusions under a typical E&O policy:
Illegal Acts
If you intentionally break the law or commit fraud, no insurance coverage will help you – this includes E&O insurance. E&O covers honest mistakes, not criminal behavior.
Bodily Injury & Property Damage
Physical injuries or property damage to a third-party usually fall under General Liability insurance, not an E&O policy. For instance, if you accidentally spill coffee on a client’s server or a client is injured after tripping and falling in your office, then General Liability insurance would respond, not E&O coverage.
Employment Related Issues
Claims against your firm related to hiring, firing, or harassment of an employee are covered under Employment Practices Liability Insurance (EPLI). These types of claims are not intended to be covered under your E&O insurance policy.
Cyber Risks
While some E&O policies may have small add-on coverage for cyber security related issues, the coverage is not intended to be comprehensive. A standalone Cyber Insurance policy is usually required to properly cover your firm against data breaches, ransomware, hacking, and other common cyberattacks.
Common E&O Policy Terminology You Should Know
Insurance contracts use specific language that determines when and how the policy will respond in the event of a covered claim. Understanding policy terms like “Claims-Made” and “Retroactive Date” can help you better understand the basics of Errors & Omissions insurance and help you avoid a denied claim.
If you are not sure of any of the coverage terms in your E&O policy, then ask your broker to provide an explanation in plain English before you bind coverage.
Claims-Made Policies
Most General Liability policies are “occurrence-based,” meaning they cover accidents that happened while the policy was active, regardless of when the claim is filed. Errors and Omissions policies, on the other hand, are almost always written on a “claims-made” policy form.
This means the E&O policy must be active both when the work was done AND when the claim is filed. If you cancel your policy today and a client sues you tomorrow for work you did last year, then you will not be covered.
Retroactive Date
You will often see the term “Retroactive Date” in your E&O policy. This is the “start date” of your coverage history.
As long as you maintain continuous coverage, your retroactive date stays the same. However, if you let your coverage lapse, then you might lose your retroactive date and coverage for all past work.
Always check this date on your policy documents. If you switch insurance carriers, make sure they honor your original retroactive date so that you do not lose coverage for your past projects.
Retention (Deductible)
This is the amount you must pay out-of-pocket before the insurance company pays a dime. Retention = Your share of the risk. For example, if you have a $5,000 retention and a legal bill is $20,000, you pay $5,000 and the insurer pays $15,000.
Real World Scenarios
To help further drive home the importance of understanding the basics of Errors & Omissions insurance, let’s look at a few real-life scenarios for professional service providers.
The Marketing Consultant
A marketing firm is hired to print brochures for a client’s trade show. They accidentally use the wrong phone number on 10,000 flyers. The client demands the firm pay for the reprinting costs and the estimated lost business. E&O insurance steps in to cover the financial damages.
The IT Consultant
An IT provider recommends a specific software integration. The integration fails, corrupting the client’s customer database. The client sues for the cost of data recovery and business interruption. The IT provider’s E&O policy covers the legal defense and the settlement.
The Executive Recruiter
A recruiter places a candidate who turns out to be unqualified and steals from the company. The company sues the recruiter for failing to vet the candidate properly. The recruiter’s insurance helps cover the legal costs associated with the negligence claim.
Protect Your Reputation
Your reputation is your most valuable asset. Understanding the basics of Errors & Omissions insurance can help ensure you choose the right coverage to protect the credibility that you have built.
When you have E&O insurance in place, you have the resources to help defend your good name against baseless allegations without bankrupting your business. It also signals to your clients that you are a professional organization and take financial protection of your firm and your clients seriously.
Further, as you look to grow your practice, reviewing your insurance coverage becomes ever more critical. Proper E&O insurance is a fundamental layer of protection that allows you to sign larger contracts and work with bigger clients with confidence.
Take a moment this week to review your current insurance coverage. Do your clients require specific limits that you don’t currently have in place? Do you have coverage for the specific advice that you give?
If you are unsure, then reach out to BR Risk Group™ Specialty Insurance. We’re here to walk you through it to ensure you have the coverage you need to protect your firm and your reputation.
Disclaimer: This content is for informational purposes only and should not be considered as legal or financial advice. Coverage varies by carrier and form; always review your specific policy and endorsements.