The Risks of Canceling Your E&O Insurance
Starting a small business is a big risk – one that requires your money and time. That's why small business insurance makes sense. You need it to protect your investments, and Errors and Omissions Insurance is one facet of that protection.
E&O Insurance covers lawsuits brought against your business by clients dissatisfied with your work. Though you don’t plan on making mistakes (really, who does?), you can’t plan for every oversight or error. Even if you don’t think you’ll always use your policy (which is a good thing), the coverage can help you long after a project ends. A claim can pop up weeks, months, or even years after you finish up your work, depending on your state's statute of limitations.
Let’s explore why it's a good plan to keep an active Errors & Omissions Insurance policy and how starting and stopping coverage can hurt your small business.
Stop and Go, To and Fro: An E&O Insurance Dance
Say you’re a safety consultant for a large construction company. To supplement your income, you also offer freelance safety consulting services, but your side gigs are few and far between. To save some money, you start and stop your Errors and Omissions Insurance (aka Professional Liability Insurance) coverage between jobs.
Be warned: this mistake could cost you thousands of dollars.
E&O Insurance policies often operate on a “claims-made” basis, which means incidents and claims that happen before your policy was active or after it was terminated can't be covered. So say you wrap up a freelance consulting project and cancel your policy. Months later, the client files a claim against you for overlooking a huge safety flaw. Because your policy was inactive when the claim was filed, you can't draw on the E&O policy you had at the time of the project.
To collect benefits, your Errors and Omissions policy must be active…
- When the alleged incident occurred.
- When the claim is filed.
Both of these conditions must be met to receive your benefits. Without coverage, you’ll have to pay for lawsuits out of pocket. (To learn more, read our post, “What Is Claims-Made Insurance Coverage?”)
The moral of the story: for adequate protection, it's wise to keep an E&O policy active throughout the life of your business, even after you retire or quit. Plus, starting and stopping coverage can be a red flag to insurance providers, which drives up your rates.
Changing E&O Coverage Doesn't Have to Mean Zero Protection
Ideally, you would keep the same E&O policy and never switch. But life and business can be messy and sometimes a change can be a good thing. So what do you do when you want to switch providers? Is there a way to cover past work if you start a new E&O policy?
To account for any gaps between your new and old policies, you can purchase…
- Prior acts / nose coverage. Usually available through your new insurance provider, prior acts or nose coverage offers retroactive protection for past mistakes or work that hasn’t been reported.
- Tail coverage. This coverage ensures you can report claims after your old policy has been canceled. This is particularly important for small-business owners when changing providers or closing their business.
Talk to your insurance agent to learn more about your options, and consult them before canceling your E&O policy. For more tips, read, “4 Things to Check before Canceling a Small Business Insurance Policy.”