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Understanding errors and omissions (malpractice) lawsuits

Insureon Staff.
By Insureon Staff
April 4, 2014
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As with any lawsuit, your best chance of weathering an errors and omissions claim is to know what to expect.
A group of lawyers consulting behind a gavel.

An errors and omissions (malpractice) lawsuit can happen to anyone. But that doesn't mean all small business owners are familiar with what happens when someone is unhappy with your work and decides to sue your business.

Many E&O claims can be resolved before they become a full-fledged lawsuit. Let's take medical malpractice lawsuits, for example. According to Medscape's Guide to Winning Your Malpractice Lawsuit, about two-thirds of all malpractice claims are withdrawn, dismissed, or dropped. Only about eight percent of medical malpractice lawsuits ever reach a courtroom.

As with any lawsuit, your best chance of weathering an errors and omissions claim is to know what to expect. Let's take a look at how E&O / malpractice lawsuits work, starting with the types of situations that can prompt a claim.

What causes E&O / malpractice claims?

The first stop on the road to an E&O claim happens when a third party (someone outside of your business) expresses dissatisfaction with your professional services. If you can't find a way to resolve the issue, you could receive a formal complaint (a summons) from the third party's lawyer. This document outlines your alleged transgression.

Remember, errors and omissions claims are related to the work you do.

Common claims stem from:

Professional mistakes or oversights. If you're a healthcare professional, this might mean that your patient believes you've violated a standard of care. If you're an architect, a client could blame your design for the flooding problems in a new home.

Undesired outcomes. Sometimes clients and customers are simply disappointed in your work. They expected one thing, and you delivered another.

Breaches of contract. Let's say you're a graphic designer who is working on a website for a big client. At the last minute, they change up the design, which pushes the schedule back two weeks. The client decides that you agreed upon a specific launch date in your contract and every day it's not up, his company is losing money. He sues for damages.

Misunderstandings. Many errors and omissions claims stem from the simple fact that you are a professional and your client is not. Your clients might not always understand how things work or why the project is not going exactly according to plan. If they perceive the issue as a mistake on your part, you could be sued.

The point is this: unhappy customers cause errors and omissions claims. It's important to realize that many complaints don't have anything to do with the quality of a professional's work. If someone feels slighted or that they didn't get their money's worth, your business could end up getting served with a formal E&O complaint.

What happens after you're served with an E&O complaint?

As soon as you receive a formal complaint, you should immediately contact your insurance provider. Most E&O insurance policies stipulate that insurers have the duty to defend you. That means your insurance carrier will find a lawyer who specializes in E&O / malpractice lawsuits to provide you with legal counsel.

This is one of the reasons why it's extremely important for small business owners to carry errors and omissions insurance with the rest of your small business insurance. Without it, you would have to orchestrate a defense on your own. However, most insurance policies have instructions about how quickly you must contact the insurer in the event of a complaint. If you don't notify them in time, your benefits could be void.

Your lawyer will read through the formal complaint, which includes information such as:

  • The names of everyone involved
  • A summary of the case's facts
  • A list of allegations (called "counts") with the legal theory (laws and previous court decisions) to back them up
  • The demands – usually an amount of money – of the plaintiff (the person who filed the claim)

The lawyer will also ask you questions about the case. Your insurance provider may do their own research to see if the plaintiff is up to no good (has a history of fraudulent claims). Then your lawyer will decide what to do next. There are a few options:

Answer the claim. This is where you admit to or deny the allegations of the claim and explain why. You might explain the issue is not your fault but may be someone else's. Essentially, this is your response to the claim.

Try to dismiss the claim. Based on the specifics of the claim, your lawyer may try to have the claim dismissed on legal grounds. Perhaps your lawyer believes it's baseless, or maybe too much time has passed between the incident and the filing (this is called the "statute of limitations").

Countersuit. Depending on the situation, you can turn around and sue the plaintiff. The complaint process starts over, but if the suits go to trial, both cases will be tried as one.

Do nothing. This really isn't an option because if you do nothing, the judge may award the plaintiff everything they're asking for in what is called a "default judgment." But this could happen if a business owner is unfamiliar with lawsuits and doesn't seek legal counsel. Generally speaking, you need to respond to the court within 20 to 30 days.

If the claim is dismissed, you have nothing more to worry about. And if your errors and omissions insurance provides funds for legal defense (which most do), you won't pay anything more than your deductible.

If the claim isn't dismissed, you'll have a meeting with the court to set deadlines. Often, one of the deadlines will be for a mandatory settlement conference where you'll get the chance to settle the dispute out of court.

If you can't reach an agreement during the settlement process, you'll enter the period of "discovery," where you and your lawyer gather evidence for your defense. This might include records (like medical records, sales receipts, invoices, etc.), written testimony, and interviews with the attorneys.

Before the case actually goes to trial, you and your lawyer can try to:

Get the case dismissed based on legal reasons.

Go directly to judgment. This is only for cases where the facts aren't disputed. The judge will decide how much to award the plaintiff without a jury. Errors and omissions insurance can cover the cost of judgments.

Settle the case out of court. This is usually the cheapest option, though you'll likely still have to pay the plaintiff a settlement (which your E&O coverage can pay for).

Essentially, you can decide to settle a case at any point during the process – even during the trial. Most of the time, a settlement is the most cost-effective solution for everyone involved.

How can small business owners win an errors and omissions lawsuit?

All defendants are innocent until proven guilty – and an errors and omissions lawsuit works no differently. This places the burden of proof on the person who initiates the lawsuit. E&O lawsuits are civil (not criminal) cases, which means the plaintiff must prove they are "more correct" in the dispute than you are. In order to rule in favor of the plaintiff, juries are often told that they must be 51% sure you are guilty of the allegations.

To win over the jury, plaintiffs must prove certain aspects of an errors and omissions case. Generally, they must illuminate:

  • The relationship between you and the client
  • How you failed to uphold a certain professional standard
  • The damages / injuries caused by the allegations

If any one of these factors isn't proved to the jury, you'll likely win your case. If you lose, you can always appeal and start the process over.

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