What Types of Businesses Need Errors and Omissions Insurance?
March 12, 2018
What Is Errors and Omissions Insurance?
Errors and Omissions insurance, commonly known as E&O insurance, is a form of professional liability insurance designed to protect employees and employers against clients' claims of negligence or inadequate work. E&O policies usually cover legal costs associated with the claim and most or all of the ensuing settlement, though a policy may not cover the entire settlement if the amount exceeds the limit specified in the insurance contract.
In many industries, lawsuits happen whether the associated claims are legitimate or not. For example, a graphic designer is sued after creating a trademark that another business claims is similar to their trademarked logo. Court costs are normally high even if the claim is baseless and ends in the defendant's favor. In such a case, E&O insurance could financially protect the graphic designer during a costly legal battle.
What Does E&O Insurance Cover?
An E&O policy defends you and your employees from wrongful acts, which means any actual or alleged breach of duty, negligent act, error, omission or personal injury committed by you in the performance of your professional services. It excludes malicious or intentional acts, and other restrictions are outlined in the restrictions clause of the contract. The definitions portion of the contract should give you a clear idea of what is covered. Defense costs are covered up to the policy's specified limit. Also, any special or specific types of coverage are outlined in the declaration section to give you further clarification. For example, this could be marketing consulting services if your specific industry is marketing, or it could be IT consulting services if your specialty is information technology.
Not all E&O policies cover work that was performed prior to the policy's effective date, and some may not cover temporary employees. If these issues are applicable to you, inquire about them before choosing a policy. As with other types of insurance, those who have a history of E&O claims may be subject to higher premium costs.
Is E&O Insurance Legally Required?
While not all types of businesses are required by law to carry this coverage, some professionals are required by regulatory or licensing boards within their profession to have it. In more than 10 states, real estate agents are required to show proof of E&O coverage before they receive their licenses. Many states require all process servers to have E&O insurance with specific limits.
While local or state laws may or may not expressly require some types of professionals to carry E&O coverage, other laws regarding their duty of care to clients make it a necessity.
Here are some examples of such professionals:
- Insurance Agents
- Home Health Aides
- Occupational Therapists
- Social Workers
Is Errors and Omissions Insurance Necessary?
Although it may not always be required by law, clients often require independent contractors to have E&O insurance to qualify for a project contract. This is not just limited to construction and IT fields. For example, a photographer might be required to have professional liability insurance to film in a particular building.
In the world of independent contracting, smaller risks are usually connected to smaller rewards. If you are a contractor and are willing to purchase your own E&O coverage, you have a wider range of opportunities, including qualifying for certain government contracts. According to Subpart 28.3 of the Federal Acquisition Regulation, government contractors are required to carry insurance for all perils that they are exposed to.
Who Needs Errors and Omissions Insurance?
As a rule, if you are a professional who provides a service to a client, E&O insurance is beneficial even if laws or licensing boards do not require it. E&O insurance is useful whenever you or your employees provide a service that a client could claim is inadequate or tied to negligence.
For example, if you are a real estate agent, you may find yourself facing a lawsuit if a homeowner finds defects in their new property after closing. This homeowner may allege you did not disclose the defects and try to collect based on the diminished value of the home.
To illustrate another example, imagine that you are hired as a branding consultant to help revive a struggling company. If the innovative techniques that you employ are not enough to keep the business open, the company’s owner may try to blame you and file a lawsuit.
No matter how baseless both claims are, they can tie you up in legal fees –something that can be avoided with the purchase of an E&O insurance policy.
Even if you already own a Business Owners Policy, you are not protected from lawsuit-related costs. E&O insurance is necessary for proper protection against professional liability claims.
Benefits of Errors and Omissions Insurance
With E&O insurance, you can strengthen your company's reputation by demonstrating that you are well-prepared and risk-averse. E&O insurance also shows that you have high standards and hold your workers to them as well. In addition, it shows that you realize the potential for human errors and care enough about your company to protect it in the event of a mistake. Although many professionals never have to file an E&O claim, having the policy provides valuable peace of mind.
Hiscox offers E&O insurance for many industries in addition to commercial general liability and Business Owners Policies. If there is a possibility of your company being accused of performing poor work or being negligent, you can request a quick E&O premium quote by selecting your profession and state here or speaking to one of our knowledgeable representatives.