A Small Business Guide to Errors and Omissions

Chapter 2: Dealing with Errors and Omissions Lawsuits
Part 1: What Happens after You're Served with an E&O Complaint?

As soon as you receive a formal complaint, you should immediately contact your insurance provider (if you have one). Most E&O Insurance policies stipulate that insurers have the "duty to defend" you. That means your provider will find a lawyer who specializes in E&O lawsuits to provide you with legal counsel.

This is one of the reasons why it's extremely important for small-business owners to carry Errors and Omissions Insurance with the rest of their small business insurance. Without it, you would have to orchestrate a defense on your own. (For more information on finding a lawyer on your own, jump to the next section.) However, most insurance policies have instructions about how quickly you must contact the insurer in the event of a complaint. If you don't notify them in time, your benefits could be void.

Once you have a lawyer, they will read through the formal complaint, which includes information such as…

  • The names of everyone involved.
  • A summary of the case's facts.
  • A list of allegations (called "counts") with the legal theory (laws and previous court decisions) to back them up.
  • The demands — usually an amount of money — of the plaintiff.
To avoid losing your E&O Insurance benefits, be sure to notify your provider about the complaint ASAP.

The lawyer also asks you questions about the case. Your insurance provider may do their own research to see if the plaintiff is up to no good (e.g., has a history of fraudulent claims). Then your lawyer will decide what to do next. There are a few options:

  • Answer the complaint. This is where the defendant (the person being sued) admits to or denies the allegations of the claim and explains why. You might explain the issue is not your fault but may be someone else's. Essentially, this is your response to the claim.
  • Try to dismiss the claim. Based on the specifics of the complaint, your lawyer may try to have the claim dismissed on legal grounds. Perhaps your lawyer believes it's baseless. Or maybe too much time has passed between the incident and the filing (this is called the "statute of limitations").
  • Countersue. Depending on the situation, you can turn around and sue the plaintiff. The complaint process starts over, but if the suits go to trial, both cases will be tried as one.
  • Do nothing. This really isn't an option because if you do nothing, the judge may award the plaintiff everything they're asking for in what's called a "default judgment." But this could happen if a business owner is unfamiliar with lawsuits and doesn't seek legal counsel. Generally speaking, you need to respond to the court within 20 to 30 days.

If the claim is dismissed, you have nothing more to worry about. And if your Errors and Omissions Insurance provides funds for legal defense (most do), you won't pay anything more than your deductible.

If you don't respond to a complaint, the judge might automatically side with the plaintiff.

If the claim isn't dismissed, you'll have a meeting with the court to set deadlines. Often, one of the deadlines will be for a mandatory settlement conference where you'll have the chance to settle the dispute out of court.

If you can't reach an agreement during the settlement process, you'll enter the period of "discovery," where you and your lawyer gather evidence for your defense. This might include paperwork (medical records, sales receipts, invoices, etc.), written testimony, and interviews with the attorneys.

Before the case actually goes to trial, you and your lawyer can try to…

  • Get the case dismissed on legal grounds.
  • Go directly to judgment. This is only for cases where the facts aren't disputed. The judge will decide how much to award the plaintiff without a jury. Errors and Omissions Insurance can cover the cost of judgments.
  • Settle the case out of court. This is usually the cheapest option, though you'll likely still have to pay the plaintiff a settlement (which your E&O coverage can pay for).

Essentially, you can decide to settle a case at any point during the process — even during the trial. Most of the time, settlement is the most cost-effective solution for everyone involved. For a more detailed look at the possible outcomes of a lawsuit, jump to Chapter 4.

Next: Part 2: How to Keep Your Cool and Listen to Your E&O Lawyer