Most businesses will experience a disagreement with a client or business partner over a perceived work mistake at some point, which could lead to an errors and omissions lawsuit.
The legal "causes of action" for an errors and omissions (E&O) suit can vary from negligence (an accusation that your work was careless or didn't meet industry standards) to breach of contract (you didn't follow through on the promises you made in your contract with the plaintiff). To make their case, the plaintiff will have to establish that:
If the plaintiff is able to prove these points, the judge will likely order you to pay a judgment. Even if the judge rules in your favor and doesn’t order a judgment, you still have to pay for your legal defense and court costs.
A number of small, common errors can expose your business to errors and omissions liabilities. For example:
Poor communication. Even if you accurately describe your prices and expected outcomes, a client might form unrealistic expectations for your work. When their expectations don’t materialize, they may sue your business.
Clerical errors. A clerical error in an email, contract, or a shipping address can cause miscommunications and delays in your work.
Failure to disclose. If you don’t provide adequate instructions to a client on, for example, how to use certain professional equipment, the client may hold you responsible for any damages they suffered due to improper use.
Late work. An interruption in your supply chain could make you liable if your client doesn't get what they need on time – even if it's out of your control.
In 2010, Los Angeles County Superior Court awarded diver Daniel Carlock $1.68 million in damages in a landmark professional negligence lawsuit for the scuba diving industry. Six years before, Carlock had been diving off Long Beach when the excursion he was on left the area without him.
While Carlock spent five hours floating in the choppy water off Long Beach, the dive master mistakenly marked Carlock present on the boat at a different diving location. Finally, the crew realized he was missing and alerted the Coast Guard. Carlock was eventually rescued by boy scouts.
According to Carlock, he developed post-traumatic stress disorder from the experience, as well as skin cancer from prolonged exposure to the sun.
Before the lawsuit, many diving excursions depended on informal measures – like the buddy system – to keep their divers safe. Ocean Adventures and Sundive Charters, the charter company that ran Carlock’s excursion, tried to argue that Carlock took on certain risks by not adhering to these informal measures.
The judge disagreed, saying that being abandoned at sea wasn’t a risk inherent to the sport and that diving excursions had a professional duty to keep track of their divers. The negligence lawsuit sparked major changes in the standard practice of counting divers.
In 2017, the medical company Theranos settled with Walgreens for an undisclosed amount (allegedly about $30 million) after Walgreens sued the blood-testing startup for breach of contract. Before the relationship between the two companies fell apart, Theranos had operated dozens of labs at Walgreens locations across Arizona.
In the lawsuit, Walgreens claimed that Theranos lied about its blood-testing technology when the two companies signed a contract in 2010. In the contract, Theranos claimed it could offer low-cost, minimal-pain blood tests using just the blood from a finger prick. In reality, these tests were less accurate and more dangerous than Theranos promised in the contract.
While the details of the settlement between the two companies are confidential, Theranos also faced costly lawsuits from the Centers for Medicare and Medicaid Services, the State of Arizona, and Partner Fund Management (who invested in the startup). These won settlements and judgments on claims similar to Walgreens's.
To decrease the chance of facing an errors and omissions lawsuit, implement the following risk-reduction measures:
Always sign a contract. Make sure your contracts clearly define your obligations, deadlines, and compensation, so you can manage expectations from the start. Work with an attorney to ensure that your contracts are legally sound.
Leave a paper trail. Document all communication with clients, include verbal communications like meetings and phone calls. A paper trail helps clear up disagreements when two people remember a conversation differently.
Be transparent. If you keep clients up to date on your progress and potential pitfalls, they’re less likely to be surprised by the outcome of a project. Plus, transparency builds trust, which also helps deter lawsuits.
Even if you try your hardest to avoid an errors and omissions lawsuit, a dissatisfied client or business partner may still decide to sue you. Errors and omissions insurance covers your legal costs in this situation, including:
If your errors and omissions policy includes a "right and duty to defend" clause, you won't have to worry about spending time arranging your own legal defense. This useful provision shifts the burden of managing the case from you to your insurance provider.
Complete Insureon’s easy online application today to compare errors and omissions insurance quotes from top-rated U.S. companies. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.