A Small Business Guide to Errors and Omissions

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Introduction: What Are Errors and Omissions?

Errors and omissions are mistakes or oversights made by a professional while carrying out their professional work. The thinking goes that if you're a professional — someone with special skills or training to perform a job — then your customers, clients, or patients can expect you to possess a certain level of competence in your work. You are expected to uphold what's called a "standard of care."

In other words, professionals should "know better" than to make certain mistakes while doing their job. A dentist, for example, is expected to be able to recognize a cracked tooth and recommend treatment. An architect should be able to design a new police station without structural flaws. And a lawyer is expected to provide sound legal counsel to her clients.

Because of this expectation, professionals of all stripes can be held responsible (or "liable" in legal terminology) for providing less-than-stellar services. When someone outside your business feels you haven't lived up to expectations, they can file an errors and omissions claim against your business in an effort to recoup their financial loss.

Malpractice Claims: Not Just for Healthcare Providers

When most of us hear the word "malpractice," we think of healthcare professionals, probably because those cases tend to get media attention. But almost any small-business owner who provides professional services can be accused of malpractice — it just might not be called the same name.

Different industries have various ways of referring to malpractice, but the following terms mean roughly the same thing:

  • Malpractice. This term usually refers to cases involving medical practitioners, lawyers, and public officials.
  • Errors and omissions. This term is used in fields that involve some kind of technical or mathematical finesse, such as accounting or IT.
  • Professional liability. This may be the most common term concerning professional errors. Some industries replace "professional" with a more specific term, such as photographer's liability.

Luckily, insurance providers have designed a type of insurance to protect all kinds of professionals from the high cost of these service-related claims. Unsurprisingly, this policy goes by different names — Professional Liability Insurance, Errors and Omissions Insurance, or Malpractice Insurance — depending on the profession in question. You'll see all of these terms throughout this guide.

But the best part of this multi-named policy? It protects you from professional lawsuits even when you haven't made a mistake.

Errors and Omissions Claims: Expensive Even When You Don't Make a Mistake

Small-business owners can be sued for professional liability claims even if they perform their work without a hitch. That's because these claims often stem from factors that are largely beyond your control, including a client's…

  • Unmet expectations (no matter how outlandish they are).
  • Fundamental misunderstanding of the limitations of your profession.
  • Confusion, possibly as the result of not having read the contract.
  • Personality "quirks" that make it difficult to negotiate.

You might be thinking that claims stemming from these issues probably wouldn't hold up in court — or even get there in the first place. And you might be right. But for most small-business owners, that doesn't matter. You still need to hire legal counsel as soon as a formal complaint arrives, which can cost thousands of dollars, even if you never go to court.

Small businesses are not safe from expensive settlements or judgments just because they don't have deep pockets. In fact, research shows that small businesses in this country pay the majority of liability costs.

According to the U.S. Chamber Institute for Legal Reform's Tort Liability Costs for Small Business report New browser window icon., small businesses bore 81 percent of America's $105.4 billion in tort liability costs in 2008 — even though small businesses only accounted for 22 percent of the revenue.

In 2008, small Businesses paid for 81% of all tort costs in the U.S.

A 2005 Small Business Administration report [PDF] New browser window icon. found that the cost of litigation in the cases it studied ranged from $3,000 to $150,000. Only one-third of those cases cost less than $10,000.

$3,000 — $150,000: Typical cost of litigation for small businesses.

Don't like the sound of those numbers? Then protect your small business from these expensive claims. Consult this guide to find out…

  • What errors and omissions lawsuits are and how to you can deal with them.
  • How errors and omissions lawsuits affect professionals in various industries.
  • What you can do to reduce your chances of being sued for professional liability.

Next: Chapter 1: Malpractice Lawsuits: The Basics