Understanding Errors and Omissions Coverage
Errors and Omissions Insurance coverage is the protection that shields you and your employees when clients accuse you of making mistakes that cost them money. These accusations may include claims that your work was inadequate, unprofessional, or incomplete.
As a small-business owner, you know all too well that a disgruntled client who blames your service for their financial loss might sue. If they do, your E and O coverage can help defend your business in many important ways.
Errors & Omissions Insurance Coverage Explained
Whenever clients depend on your services, they may blame you if things don't go as planned. That's where E&O coverage comes in.
E&O Insurance (also called Professional Liability Insurance) covers your business when it's sued over professional errors – real or perceived. For example:
- If a shipment goes missing, your client could sue, claiming the delay caused them to miss an important deadline.
- If a client follows your professional advice on how to run their business and they don't get the results they hoped for, they might sue to recoup their losses.
In short, E&O Insurance can help out when your client accuses you of mistakes, errors, careless conduct, or incomplete work. Even if you never made a mistake, you could still be sued.
How Does Errors & Omissions Coverage Protect My Business?
Whenever lawyers get involved in a dispute, it's expensive. Even if you can resolve the issue relatively quickly, you're still looking at a few thousand dollars in costs. If it drags on for months, those costs add up quickly.
Errors and Omissions Insurance coverage can help pay for lawsuit expenses, which might include:
- Lawyer fees. Lawyers generally charge by the hour, and a lawsuit involves a lot of their time.
- Court costs. Filing documents with the court or using a court reporter at a deposition comes with a fee.
- Administrative costs. Lawsuits involve lots of trading of documents for lawyers to examine. That means shipping, processing, software, and photocopy charges.
- Settlements. Most lawsuits settle out of court to save both parties money, but you may still have to pay the plaintiff, depending on what your lawyer recommends.
- Judgments. If you go to trial and lose, you must pay a court judgment or risk a judgment lien being placed on your business assets.
Is All E&O Insurance Coverage The Same?
Each Errors & Omissions policy – and the exact coverage it offers – differs based on the company's needs, priorities, and risk profile. For example:
- Policies may or may not offer coverage for certain risks, such as cyber liability, intellectual property claims, or regulatory infractions.
- The liability limits might differ.
- Deductible levels might vary.
- Some policies might exclude certain coverages, such as punitive damages.
When shopping for E&O Insurance coverage, it's a good idea to get quotes from multiple insurance providers and have an insurance agent explain how they differ and which one is best suited to your business.
E&O Insurance Coverage Is Time-Sensitive
Unlike other kinds of insurance, E&O coverage operates on a "claims-made" basis. If a dispute stems from work you performed before you obtained your E&O coverage, you won't be able to access your benefits. That's why the best to keep one E&O Insurance policy throughout the life of your business.
What Errors and Omissions Insurance Does Not Cover
Errors and Omissions coverage isn't a silver bullet for the risks your business faces. But there is usually a small business insurance policy for most problems your business may face. Let's take a closer look at what Errors & Omissions doesn’t cover and which policies can fill the gaps.
Errors and Omissions Insurance doesn't cover:
- Intentional wrongdoing or harm
- Illegal acts
- General liabilities
- Employee injuries
- Employee lawsuits
- Property damage
1. Intentional Wrongdoing or Harm
Let's say you opened a small antique shop right before the recession. It seemed like a great idea at the time, but no one really wants to buy a 16th-century armoire when they can barely afford to pay their electric bill.
Desperate for money, you come up with a quick scheme. You have a valuable Italian painting in your shop that you decided to replicate by painting multiple fakes to sell as real at a steep discount.
Deceiving your customers isn’t a wise move. Not only will it ruin your shop’s reputation, but it could also land you in court. Plus, no business insurance policy can cover intentional wrongdoing.
2. Illegal Acts
You scrap the fake painting idea, but you’re still strapped for cash. There’s an authentic Chinese porcelain urn insured for $85,000 in your gallery. You pay two kids $20 to run around your store and knock into the urn, sending it shattering to the ground. You file a claim to get the insurance money, but the claims adjuster smells a fish and the claim is denied.
For the record, E&O coverage doesn't include insurance fraud. No policy covers illegal activity.
3. General Liabilities
Say a leaky pipe near the front of your shop creates a puddle of water. As a client walks in with a crystal chandelier to place on consignment, she slips on the puddle and breaks her ankle. Your E and O coverage won't pay for the lawsuit that follows (or a property damage claim over the broken chandelier).
You need General Liability Insurance for that.
Also known as "slip-and-fall insurance," General Liability can protect your antique shop from third-party lawsuits over bodily injuries, advertising injuries, and property damage. (For more on the difference between these two policies, read "General Liability Insurance vs. Professional Liability Insurance.")
4. Employee Injuries
You have a wonderful, meticulous assistant to help you clean your fragile inventory twice a week. Your assistant gently dusts every hanging lamp, chandelier, and lantern in the shop. One day, she loses her balance on the stepladder and falls to the ground, breaking her wrist. She needs medical treatment and time off work, so you'll need to pay for her lost wages and hospital bills.
Errors & Omissions Insurance won't cover the expenses, but Workers' Compensation Insurance probably will.
5. Employment Disputes
With your assistant unable to work, you look to hire a temporary replacement. One of your applicants is a woman who doesn’t communicate effectively. After interviewing a few other candidates, you select a teen with after-school availability.
That woman you decided not to hire? She threatens you with a discrimination lawsuit, claiming you passed on hiring her because of her age. Employment Practices Liability Insurance is your go-to policy here, not E&O Insurance coverage.
6. Property Damage
Your nifty little antique shop is located in an old factory space, giving it an industrial charm. Unfortunately, some of the electrical wiring isn't up to code and a fire breaks out, destroying your shop, art, antiques, and priceless items.
You need a Property Insurance policy to reimburse you for these losses, not E&O coverage. Property Insurance can cover business property, inventory, and supplies lost or damaged by theft, fire, and some weather events.