Why Errors and Omissions Insurance Costs Less Than a Lawsuit
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Why Errors and Omissions Insurance Costs Less than a Lawsuit

Imagine being a wedding planner trying to sort out what led to a wedding-day disaster. Or imagine you're a software developer whose code was just hacked. Or say you're a retirement adviser whose consultation caused one retiree to lose 10 percent of her life savings.

What do these situations have in common? They're all examples of when a small-business owner would be glad to have Errors and Omissions Insurance.

This coverage, also called Professional Liability Insurance, covers your legal costs when customers and clients sue you claiming that there was a problem with your work or that you failed to fulfill your professional obligations.

Annual premiums for E&O Insurance typically only cost $500 to $1,500 for a small-business owner, which makes it a great investment, especially considering that some lawyers bill $500 per hour.

To help you understand how this insurance works and whether your business needs E & O Insurance, let's look at what a lawsuit might cost your business.

What's the Best-Case Scenario if My Business Is Sued?

While we all know that lawsuits can cost anywhere from thousands to millions of dollars, there must be some situations where small-business owners can get off scot-free when they're sued, right? Well, not exactly.

In the risk management world, we sometimes talk about "frivolous lawsuits," which are lawsuits that have no chance of winning, but are still filed against your small business. In a sense, these are your best-case scenarios. A frivolous lawsuit might be a bluff that a client quickly withdraws or the lawsuit might be filed, only to have a judge dismiss it before it can go to court.

Unfortunately, even frivolous lawsuits come with a hefty price tag. A study [PDF] done by the Institute for Legal Reform found that you'd still end up paying $2,000 to $5,000 in legal fees to fight a frivolous lawsuit.

Why are frivolous lawsuits so expensive? Even if a lawsuit has no chance of winning, you'll still have to defend your company. You'll have to hire an attorney to give you counsel, review the facts of the case, and potentially file a counterargument at the courthouse. Given how expensive lawyers are, your legal bills can easily total between $2,000 and $5,000.

The takeaway: even in the best-case scenario, a lawsuit likely costs more than your E&O premiums.

Worst-Case Scenario: Small Business Lawsuits, Debt, and Bankruptsy

Most small-business budgets don't have room for error. If you suddenly had to pay a $10,000 legal bill, chances are you wouldn't have the money. And, honestly, in the grand scheme of things, a $10,000 legal bill is fairly inexpensive for a lawsuit.

How much does a lawsuit actually cost? Lawsuits may take a year to go to court, which means you'll be paying for a year's worth of consultations from your lawyer. With the typical corporate lawyers charging between $100 and $500 per hour, your legal bills add up quickly.

But with Errors and Omissions Insurance, you'll usually have coverage for $1 million in legal costs for a single case, which includes coverage for the damages you owe clients if you settle or lose the case.

Even in the worst-case scenario, when you owe hundreds of thousands of dollars in damages, Errors and Omissions Insurance pays your legal bills, protecting you from legal debt and bankruptcy. Of course, there are some things this policy doesn't cover. For details, read "7 Things Errors and Omissions Insurance Doesn't Cover."

E&O Insurance: Further Reading

E&O Insurance in the Insureon Blog