What is errors and omissions insurance?
Sure, you can't look up "Errors and Omissions Insurance" in a dictionary. But that doesn't mean a concise and straightforward definition of the coverage doesn't exist. Here's a quick definition of Errors and Omissions Insurance with a lengthier explanation to follow.
Errors and Omissions Insurance (noun)
- An insurance policy that covers your business in services-related disputes.
- The only type of small business insurance that pays legal defense costs in lawsuits based on incomplete, negligent, or careless service.
- An important risk management tool for prudent small-business owners.
- Synonyms: E&O Insurance; E and O; Professional Liability Insurance; Malpractice Insurance.
- Usage: "When my newest client blamed my company for his business losses and sued me, I was lucky to have E&O Insurance."
E and O Insurance Defined by What It Covers
Generally, different insurance policies cover different risks. E&O Insurance is designed to cover two main risks faced by most businesses…
- Damages caused by your alleged mistakes. Even the smallest error can trigger a chain reaction that causes your clients to lose money or potential business. A typo in a calendar or contract can have unintentional and costly repercussions.
- Frivolous lawsuits. Your business doesn't have to be at fault to get sued. If your client has unreasonable expectations or simply thinks that your work caused their losses, they can force you to spend thousands proving them wrong in court.
E & O Insurance is the only small business insurance that protects your business in these situations. (For more details on how your business might get caught in the crosshairs of these claims, see "Examples of Errors & Omissions Lawsuits.")
E&O Insurance Defined by How It Protects Your Business
When your business is sued for service-related errors or misunderstandings, E&O Insurance covers your legal costs. Legal expenses come in many varieties and accumulate quickly, often costing your business (at least) thousands of dollars before the case settles or goes to trial. Common legal expenses include…
- Hourly lawyer's fees, billed for every minute your lawyer spends reading, writing, researching, or talking to you.
- Expert witness fees for when you need to hire someone to attack a technical point of your opponent's case.
- Administrative costs for the moving, shipping, storing, and processing of all the documents related to the case.
- Court costs for the filing of documents, payment of court reporters, and processing of hearing transcripts.
- Settlement costs, including the settlement payment itself plus the potential cost of a mediator or arbitrator.
- Judgment amounts levied by a judge or jury after trial.
Additionally, an E&O policy with the "right and duty to defend" provision removes the day-to-day administrative hassles from your plate. This provision ensures your insurance provider will handle hiring and communicating with your lawyer, gathering documents and witnesses, interacting with the opposing party, and scheduling with the court.
E&O Insurance Policy Defined
An E&O policy will outline…
- The numbers. This includes your coverage limits, deductibles, and premiums.
- The coverages included and excluded. Your policy might include additional coverage or exclude certain types of coverage that your business doesn't need.
- Conditions. This section details the responsibilities you and your insurance provider must fulfill when a claim is filed.
E & O Insurance Defined As a "Claims-Made" Policy
E and O differs from other insurance policies because it is "claims-made" coverage. This means both the claim against you and the incident that triggered the claim must occur during your E and O policy's active term in order to receive your insurance benefits. Timing is extremely important with E & O coverage. That's why most small-business owners keep one E&O policy active for the entire life of their businesses.
If you've never carried E&O Insurance before or you let a policy lapse, all is not lost. An Insureon agent can help you add on the appropriate endorsements that fill the gaps in your protection.
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