Anatomy of an Errors & Omissions Lawsuit
Can't find your industry?
I appreciate the thoroughness and speed of Insureon's service. They answered my questions and helped me to get the products I needed quickly.
Customer Rating
4.5 out of 5 stars

Anatomy of an E and O Lawsuit

A lawsuit can be one of the costliest events in the life of your small business, with bills climbing into the tens of thousands of dollars. Without large cash reserves or the proper insurance, a legal battle can bankrupt your company.

Errors and Omissions Insurance (also known as E&O Insurance, Professional Liability Insurance, or Malpractice Insurance) covers your small business when a client claims you performed your services incorrectly, made an oversight, or didn't fulfill their expectations.

What Is the Legal Basis for an E&O Lawsuit?

Generally, the type of lawsuit covered by E&O Insurance will claim that you breached a contract or performed your services negligently (which, in layman's terms, means "carelessly"). In either case, the person suing you will have to prove that…

  • You were obligated to perform a certain way. Your obligations might be spelled out explicitly in a contract (e.g., completion date, use of certain products, etc.) or may be more loosely defined by your industry's standards (or the reasonable expectations the "standard" user of your services would have).
  • You "breached" your duty. This means that your performance didn't meet the standards of your industry or the terms of a contract. In other words, your client didn't get what they bargained for.
  • Your breach caused the client to suffer financial losses. "Causation" is a complicated legal concept, but basically your alleged mistake must be linked to the economic loss your client is claiming.
  • Damages. If your client didn't actually lose money because of your mistake, there's no liability.

Parsing out each of these things takes time — and in the case of lawyers, every hour is money. Even if you "win" by proving that your services were up to par or that your mistake didn't cause any financial losses, you'll still be on the hook for your legal defense costs.

What Situations Can Lead to an E&O Lawsuit?

Any number of small, common errors can expose your business to large liabilities. For example…

  • Miscommunication. Perhaps you were perfectly clear and accurate in your description of prices and expected outcomes. But if your client misunderstood you and based their budget on bad information, you could face a lawsuit.
  • Transcription errors. If you ship your client's product to Springfield, MA, instead of Springfield, IL, your client may incur significant delay and replacement costs.
  • Failure to disclose. Say you or an employee forgets to mention a key instruction for using a product. Your client ends up ruining the equipment, which means you're responsible for repair costs, business interruption expenses, and lost profits.
  • Missed deadlines. An interruption in your supply chain might make it impossible to finish a job by the projected completion date, and your client might not be able to wait.
  • Disclosure of confidential client info. Maybe you're talking to your spouse at a restaurant about a tricky client situation you're handling, and an interested party is in the next booth over. Such an accident could cost your client a valuable contract.

How Does E & O Coverage Proect My Business?

If you're sued, E and O coverage ensures the expense of the lawsuit doesn't drain your company coffers. Covered costs include…

  • Lawyers' fees.
  • Your lawyer's administrative costs.
  • Court expenses.
  • Expert witness fees.
  • Settlement amounts.
  • Court-ordered compensation.

Additionally, if your E and O policy includes a "right and duty to defend" clause, the insurance company will find you a lawyer and manage your case. The provision saves you valuable time and allows you to focus on running your business.

To learn more about E&O coverage, check out "How Does E&O Work? An Errors and Omissions Primer for Small-Business Owners."

How Much Does an E and O Suit Cost?

Multiple factors influence the total cost of an E&O lawsuit: the complexity of the case, your location, and how long the dispute takes to resolve, for starters.

To get multiple E & O quotes tailored to your business's unique exposures, fill out an online insurance application today.

E&O Insurance: Further Reading

E&O Insurance in the Insureon Blog