Errors and Omissions Insurance

What Is It?

Errors and Omissions Insurance (also called Professional Liability Insurance) does what its name implies: it covers your professional mistakes (errors) and the things you overlook (omissions). If you're sued over a professional mistake or oversight, this policy can help you pay for legal expenses.

A typical E&O lawsuit costs $140,584, according to the National Center for State Courts. And that's just the amount awarded to your client – it doesn't include your own legal fees. Tack on another five figures for what you'll pay a lawyer to put your case together.

E&O Insurance is most common in professional service industries such as architecture, engineering, software development, law, medicine, insurance, and accounting. Whenever someone is paying for your expertise, it's a good idea to have insurance that can cover you if you slip up.

Clients often accuse business owners of one of these three things in an E&O lawsuit:

• Professional mistakes.
• Failure to deliver promised services.
• Professional negligence.

Note that what matters here is whether a client thinks you did something wrong – they're the one who initiates the lawsuit. And even if your client's claims are frivolous, you have to defend yourself. If you don't, you risk a default judgment (aka automatically paying whatever they say you owe).

Let's dig in deeper and see how this type of liability insurance can help if you're accused of professional mistakes.

The business world is a far cry from kindergarten. You can't simply ask forgiveness for your mistakes. If your business makes an error that affects a client's bottom line, there's a real possibility you could be sued.

Example: Say you're a software developer, and you make an app that crashes on a smartphone. That could lead to an expensive lawsuit. If a client insists your software doesn't work correctly, you could be on the hook for damages. A client might claim your failed code caused them to lose profits, tarnished their brand, and cost them in all kinds of ways. Now they expect you to pay up. As we mentioned earlier, even if a client's lawsuit has no factual basis, you still may have to pay. The US Chamber Institute for Legal Reform's report Tort Liability Costs for Small Business [PDF] found that even frivolous lawsuits can cost between $2,000 and $5,000 in legal fees.

Fortunately, Errors & Omissions Insurance can help pay for your legal expenses, whether or not you're actually in the wrong.

Not everything goes according to plan. Sometimes you tell your client a new initiative will boost sales by 20 percent, but it falls short when the client doesn't allocate enough resources. 

If a client claims you haven't delivered what you promised, you could be on the hook for legal expenses. The National Center for State Courts estimates that buyer-seller contract lawsuits often cost around $65,000. Translation: vendors, consultants, and service providers, beware. 

Example. An optimistic consultant says her clients are going to see a huge lift in their sales. Unfortunately, the company's sales fall off a cliff. The consultant's failure to deliver on a promise leads to an errors and omissions lawsuit.

Of course, failure to deliver affects more than just consultants who make bold predictions. IT project managers whose subcontractors can't finish code on time, architects whose projects get delayed, and insurance agents who mismanage their clients' policies could all face costly E&O lawsuits.

If your work doesn't meet the standards of your industry, a client could accuse you of professional negligence.

Example: An architect works on an apartment building that later collapses in a heap of rubble. The architect didn't take proper care in his work and a mistake compromised the structure. That's professional negligence.

When professional negligence causes your clients to suffer financial damages, Errors and Omissions Insurance can cover the cost of the lawsuit.

How expensive are professional negligence cases? It depends. An architect whose million-dollar project is now a million-dollar heap of bricks will face a big legal bill.

Your legal bills depend on the kind of work you do, but as we noted above, courts often award six-figure damages for lawsuits over professional mishaps.

Who Needs Errors and Omissions Insurance?

Note: This chart shows some industries where E&O Insurance is common and may be required. It is by no means exhaustive. Many specialty businesses that need Errors & Omissions coverage are not listed here.

How Much Does E&O Insurance Cost?

Errors and Omissions Insurance costs vary from one business to the next, but the annual premiums shown above ($600 to $1,736) give you a good ballpark figure. The median number – $920 per year – shows the midpoint of what businesses that come to us pay for E&O coverage.

Of course, if you run a low-risk business (like a one-person software consulting company), your premiums will likely be on the lower part of that range. To put these numbers in perspective, think of them in terms of monthly costs. The typical E&O policy we sell costs $77 per month and offers either $1 million or $2 million in lawsuit protection. That's a relatively low cost for professional protection and peace of mind.

If numbers are your thing, check out our cost analysis for Errors and Omissions Insurance. You'll see how your industry and the size of your business affect rates.

Errors & Omissions Insurance tip: Some businesses get themselves into trouble when they buy E&O coverage for a specific project and then cancel their policy after finishing work for that client. Why is this a problem?

A cut-and-run insurance approach can drive up your premiums in the long term. Plus, in order to collect your insurance benefits, your policy needs to be active both...

• When you commit the error or omission.
• When the client accuses you of wrongdoing.

So if a client has a problem with your work and sues after you've canceled your policy? No coverage for you.

E&O Insurance works best when it's continuously active. Read our article What Is Claims-Made Insurance Coverage? for more on how policy cancellations affect your risk.

E & O Insurance: Further Reading