Is a Business Ever Required to Carry E & O Insurance?
For small-business owners serious about their success, business insurance is a necessity. After all, without the right kinds of business insurance, including Errors and Omissions Insurance (E&O), you risk a moment of misfortune bankrupting your otherwise healthy business.
But sometimes, E & O Insurance is more than just prudent — it is required by your contracts, your clients, your claims history, or the law.
E and O Insurance: A Key Risk Management Tool
No matter how scrupulously you manage your books, review your contracts, vet your customers, or monitor your employees, you can't control everything. E & O Insurance protects your precious cash reserves when the inevitable happens — you or an employee are accused of making a mistake. Consider these scenarios:
- A client accuses you of improperly installing their software, which made them lose sales. They sue you for damages.
- A client follows your advice about how to increase efficiency at their company, but the client ends up incurring more in costs. They blame you and sue for professional negligence.
- A simple typo on your calendar causes you to miss a crucial shipping deadline. The products don't make it to your customer in time, so they sue you for the cost of replacement goods.
While many customers are understanding, not all of them will be. If you've ever been sued, you know how expensive it can be: lawyer's fees for every minute of your case, endless administrative costs, expert witness and consulting fees, court costs, and the eventual cost of a settlement or judgment. E&O Insurance covers these costs so you can weather the storm.
E&O Insurance: Required By Client Contracts?
Low risk means low reward. While your company may be getting by on smaller orders, contracts, and clients, you might be looking to land bigger deals.
Often, larger contracts or bigger, sophisticated clients require your business to plan for contingencies by carrying E&O Insurance to cover potential mistakes or mishaps. After all, your clients benefit most when they don't have to bankrupt your company with a lawsuit.
E & O Insurance May Be Regulated by Law in Your Industry
Every industry involves different risks. In certain industries, the risk is so significant that an error or negligent performance on your part will severely impact your client's finances. To address these heightened stakes, some federal and state laws set minimum E&O coverage requirements for certain professions. For example…
- Attorneys are often required by the state or their state's bar association to carry Malpractice Insurance or to report whether they do.
- Medical professionals — i.e., doctors, nurses, and therapists — are required to carry minimum amounts of Malpractice Insurance in most states.
- Contractors working on government projects must carry insurance for "the perils to which the contractor is exposed," according to Federal Acquisition Regulations (FAR) subpart 28.3.
Other laws indirectly touching your industry might make E and O coverage virtually required, too. Accountants and tax professionals, for example, might subject their clients to legal action with inadvertent errors, and thus a sufficient E&O policy is a must.
How Your Claims History Affects E and O Insurance Rates
Sometimes, savvy entrepreneurs outsmart themselves. They buy E&O Insurance "when they need it" — i.e., to fulfill the terms of a juicy contract. But when that particular job ends, they let the policy lapse, thinking they can just buy another policy later if the need arises.
There are two major problems with this approach:
- A history of short-term policy buying makes it increasingly harder to get the next E & O policy. Insurers balance the premiums they receive over the length of the policy against the large payouts when something goes wrong. Because short-term, buy-and-drop tactics upset that balance, you might find yourself uninsurable and completely exposed.
- E and O Insurance is a "claims-made" policy. For the provider to cover a lawsuit, the same policy must have been in place both at the time of the incident leading to the claim and when the claim was actually filed. So even if you've had multiple E&O policies in the past, you're really only protected during your most recent and active policy period.
For these reasons, it's best to get one E & O policy and keep it for the entire life of your business. Contact an Insureon agent to make sure you have E&O Insurance that allows your business to secure large contracts, comply with legal regulations, and protect your company from litigation disasters.