How Does E&O Work? An Errors and Omissions Primer for Small-Business Owners
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Errors and Omissions Basics for Small-Business Owners

Running a company is a complex undertaking. From mitigating your risks, handling taxes, and adhering to zoning laws to maintaining your premises, marketing, and boosting employee morale, you already have a lot of tasks demanding your attention and supervision.

So let's not make understanding the importance of Errors and Omissions ("E&O") Insurance another chore on your endless to-do list. We created this quick guide to E&O "basics" so you can understand the whys and wherefores of E and O Insurance in a snap.

Who Needs E and O Insurance?

Any business that offers professional services should have adequate E & O coverage. E&O Insurance (also known as "Malpractice Insurance" or "Professional Liability Insurance") is a necessary safeguard against those unpredictable bad days – days where an employee loses focus and makes an oversight or a client misunderstands the terms of your service.

Very simple and common occurrences can lead to disastrous lawsuits, such as…

  • Typos. A transposed digit on an order form or the wrong meeting location in your calendar can cause your clients to miss crucial deadlines or opportunities to make money. In turn, you could be on the hook for their financial losses.
  • Advice. If a client depends on your professional recommendations and your advice doesn't bode well for them, they could sue – regardless of the actual quality of your services.
  • Miscommunication. Whatever your business, your clients expect results. If the results your client expected were different than the ones you intended to deliver, the misunderstanding could land you in court over their real or perceived losses.

There are myriad situations that can lead to services-based lawsuits against your company. Be sure to check out "What Does an Errors and Omissions Lawsuit Look Like?" for some real-world cases.

What Does E & O Insurance Do for Your Business?

When your small business is faced with a professional negligence lawsuit, E and O Insurance shields you from paying your legal costs out of pocket. Legal expenses are more than just lawyer's fees, too. Covered costs include…

  • Court fees. Every time you need a court reporter, the court charges a fee. The court also charges filing fees for filing certain documents.
  • Expert witness costs. If your dispute requires an expert to shed light on some technical detail of your service or industry standards, know those experts are usually paid thousands to testify for you.
  • Administrative and discovery expenses. Lawsuits generate tons of paper. You'll be charged for the copying, shipping, and electronic processing of most of that paper.
  • Settlements. If you settle the suit before trial, you'll have to pay some amount to the plaintiff to get them to drop the suit. You might also be on the hook for the cost of a mediator or arbitrator.
  • Court judgments. If you do go to trial and lose, the court will require you to pay your client's demanded damages.

Why Your Business Needs E&O Coverage

Beyond making sure that a services-based lawsuit doesn't bankrupt you, you'll want to have E&O Insurance to give your business a competitive edge. In fact, depending on your industry, E and O coverage may be required by contracts you land, clients you hope to woo, or regulatory bodies overseeing your industry.

For more information on why E&O coverage might be necessary for your business, read "Is Your Business Required to Carry Errors and Omissions Insurance?"

When Should Your Business Invest in E&O Insurance?

The best time to get E and O Insurance is right away. Unlike other insurance coverages, E & O is a "claims-made" policy. In short, the policy only protects you from claims filed during your active policy dates and based on incidents that happened during your active policy dates. You can't wait to get sued and then buy E&O Insurance or buy it after you make a mistake and still be covered.

That's why it's best business practice to carry one E&O policy for the entire life of your business. If you've let a previous policy lapse, an Insureon agent can help you cover your bases.

E&O Insurance: Further Reading

E&O Insurance in the Insureon Blog