General liability insurance and errors and omissions insurance both protect businesses against common liabilities, but they cover different types of lawsuits.
What is general liability insurance?
Think of general liability insurance as the foundation of your business protection plan. This policy offers a range of liability protections that most businesses need to thrive, no matter their size. A standard general liability policy covers lawsuits over:
- Non-employee bodily injuries on your commercial property
- Damage you caused to someone else’s property while carrying out your work
- Advertising injuries (slander, libel, copyright infringement, misappropriation, etc.)
What does general liability insurance pay for?
When someone outside your company files a lawsuit against your small business, your general liability policy can cover your legal expenses. That could include attorney's fees, court costs, and settlements or judgments. A policy can save you from paying hundreds of thousands of dollars out of pocket.
What is errors and omissions insurance?
Errors and omissions insurance (E&O) is also called professional liability insurance or malpractice insurance, depending on the industry. This policy has a narrower focus than general liability insurance. Though the policy also covers third-party lawsuits, it only shields your business from lawsuits based on professional mistakes.
- Negligent professional services
- Failure to meet contractual obligations
- Failure to uphold a certain standard of care
- Errors or oversights
What does errors and omissions insurance pay for?
Even if your business is falsely accused, you could still end up paying a fortune in legal fees. A disgruntled client could simply be unhappy with the results of your work and decide to sue you to make up their expenses.
Errors and omissions insurance helps ensure you don’t pay for legal expenses, whether it's over an alleged or actual error made by your company. That could include attorney's fees, court costs, and judgments or settlements.
How are general liability insurance and E&O similar?
Here’s how general liability and errors and omissions insurance are similar:
Both policies cover certain unavoidable liabilities. If you have an office building that’s open to the public, you can’t completely avoid the risk of an accident that injures someone on your property. Likewise, if you provide professional services, there’s always the risk that someone will accuse your work of causing them financial losses.
Both policies may be required by client contracts. A general contractor might require a subcontractor to carry their own general liability insurance. The same goes for professionals who work with large clients; the clients may ask your business to carry a certain amount of E&O coverage before they'll work with you. In both instances, the other party is trying to limit their liabilities in case something goes awry with your work.
Some general liability policies have work liability protection. For example, construction professionals likely have general liability policies that include products-completed operations liability insurance. This coverage protects the policyholder from lawsuits over finished work that physically hurt someone. For instance, if a contractor builds a deck that collapses, the homeowner could sue for damages if they're injured.
Both policies are usually claims-made coverage. Claims-made coverage means you can only collect your insurance benefits if both the alleged incident and the filed claim happen while the same policy is active. In the example of the collapsing deck, your general liability policy would have to be in force both when you built the deck and when the client initiated the lawsuit.
How are general liability insurance and E&O different?
Here’s how the policies fundamentally differ:
They cover different risk exposures. You can’t rely on an E&O policy to protect you when a client falls on your property and sues you for medical expenses. Only general liability covers that expense. Similarly, you can’t depend on general liability coverage to step in when you’re sued for failing to uphold professional standards of care – that’s E&O's territory.
They offer different scopes of protection. General liability lives up to its name – it’s generalized liability coverage for lawsuits, property damage, and advertising injuries. E&O only covers lawsuits over the financial losses someone experienced because of your work.
When do you need both policies?
As you can see, both policies cover liabilities that any small business owner might have. You should consider carrying both policies if you offer professional services and at least one of the following is true:
- You handle or visit client property
- You make or sell products
- You use social media or advertise your business
- People other than employees (clients, delivery people, etc.) visit your business
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