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Errors and omissions insurance claims and lawsuit examples
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 (E&O) lawsuit.
What is errors and omissions insurance?
Errors and omissions insurance, also known as professional liability insurance, insures your business against the cost of a lawsuit in the event a client accuses you of negligence, or if your work was inaccurate, late, or never delivered.
What’s the difference between a claim and a lawsuit?
An insurance claim happens when you seek reimbursement from an insurance company for a financial loss, such as the cost of renovation after a fire that's covered by your commercial property insurance. This would typically be resolved between you and the insurance company.
A lawsuit is a different story. It’s a legal demand for compensation that someone files against you in court. A lawsuit could result in a trial, a court ruling from a judge, or a settlement between the two parties.
E&O claims usually involve lawsuits brought by dissatisfied clients. If this happens, your legal defense costs would be handled by the insurance company and your E&O coverage.
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What’s the legal basis of an errors and omissions case?
The legal "causes of action" for an errors and omissions lawsuit can vary from professional negligence (such as an accusation your work was careless or didn't meet industry standards) to a breach of contract (a customer accuses you of not honoring the promises you made in a contract). To make their case, the plaintiff will have to establish that:
- Your work failed to meet a client's expectations of reasonable care, industry standards, or obligations outlined in the contract.
- The plaintiff suffered financial damages.
- The damages are related to the fact your work didn’t meet professional standards. If the plaintiff suffered these damages regardless of your work, you aren’t considered liable.
If the plaintiff is able to prove these points, you’ll likely lose your case and receive a financial penalty from the judge. Even if you win your case, you’d still have to cover your legal defense and court costs, which can prove quite expensive. That’s why so many small business owners in the professional services sector rely on an E&O policy to defray the expenses.
What situations can lead to an errors and omissions lawsuit?
In many cases, a small mistake can escalate into an expensive lawsuit. Accusations of misrepresentation, oversights, and mistakes can happen to business owners in almost every industry.
Here are a few examples of what can lead to an E&O lawsuit:
- Poor communication. If a client doesn’t fully understand your services and the expected outcome, they could have unrealistic expectations of your work. If those expectations aren’t met, they could sue your business.
- Clerical errors. Even a small error in a contract, email communication, or written letter could cause a miscommunication or a delay in your work, followed by a complaint from your customer.
- Failure to disclose. If you provided inadequate instructions to a client, such as when describing how to use specialized equipment, the client might blame you for any damage caused by improper use of that equipment.
- Late work. Disruptions, for any reason, could leave you vulnerable to a client lawsuit if you fail to deliver your work on time. This can even happen if the situation is out of your control, such as a supply chain issue that limits your ability to deliver products or services.
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What are some examples of errors and omissions lawsuits?
Whether it's frivolous or based in a valid complaint, a lawsuit can result in substantial costs for your business.
Consider the following examples of errors and omissions claims:
Spillman Technologies sued for defects in policing software
Spillman Technologies has faced numerous allegations of safety risks due to repeated failures of its dispatch and records management software systems. Spillman supplies policing software to more than 1,000 law enforcement agencies across the nation.
In March 2023, the software company was blamed for losing a police report that allegedly helped a California criminal avoid prosecution for more than four years. In other states, the software has crashed repeatedly during 911 calls, forcing operators to take notes by hand during emergencies.
The company is facing allegations from a number of sources, and has paid a $1.25 million settlement to the city of San Angelo, Texas for a glitch that delayed the arrival of first responders to the scene of an emergency.
Technology companies can bundle E&O insurance with cyber insurance in a policy called tech E&O, which would provide financial protection in this instance.
Home appraiser undervalues home, sued by Black couple
A real estate appraiser was sued for discrimination after appraising a Black couple's home in Marin County, California for an amount that was significantly lower than a previous estimate.
The appraiser, Janette Miller, valued the home at $995,000, an amount that was too low for the couple to get approval for a loan. A different appraiser had valued the home at $1,450,000 less than a year earlier.
The couple, Paul Austin and Tenisha Tate-Austin, guessed that the reason was discrimination. They removed family portraits and all other items that hinted at their race, and had a white friend greet a new appraiser. This appraiser valued the home at $1,482,500.
In February 2023, the couple reached a settlement agreement with Miller for an undisclosed amount. Miller had to attend a training session on discrimination in the real estate industry and the history of segregation, and agreed not to discriminate in the future.
E&O policies for real estate professionals often include fair housing and discrimination coverage, which would provide protection in this instance. As with any other industry, it's still better to avoid claims whenever possible.
Contractor faces lawsuit after accidentally breaking water main
In March 2023, a contractor working for the Public Service Electric and Gas Co. (PSE&G) in Hoboken, New Jersey accidentally struck the city's water main while working on an unrelated gas line. The break disrupted the city's supply of water for almost a week, causing "substantial hardship" and the evacuation of a hospital.
The city plans to sue both PSE&G and the contractor, J. Fletcher Creamer & Son, Inc., for damages due to negligence in their work. The gas line work has been suspended pending approval of the plans by city engineers and the implementation of appropriate safeguards.
E&O insurance for contractors would help cover legal fees and other related costs in this instance.
How can you reduce your business's errors and omissions liability?
You can decrease your odds of an errors and omissions lawsuit by implementing these 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 your contracts are legally sound.
- Leave a paper trail. Document all communication with clients, including 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 are less likely to be surprised by the outcome of a project. Transparency also builds trust, which helps deter lawsuits.
- Be careful. When a mistake in your line of work can have far-reaching consequences, it pays to check—and double-check—your work. Though it may take a little longer, eliminating errors and making sure you're doing your job correctly helps reduce the chance of a lawsuit.
How does errors and omissions insurance protect your business?
Even if you try your best to avoid an errors and omissions lawsuit, a dissatisfied client might still decide to sue you. Errors and omissions insurance coverage can pay for legal costs in this situation, including:
- Lawyer’s fees
- Administrative expenses
- Court fees (filing fees, court reporter fees)
- Expert witnesses
- Settlement costs (settlement payments, mediation expenses)
- Court judgments
If your E&O insurance policy has a "right and duty to defend" clause, you won't have to worry about finding your own legal defense team. This useful provision shifts the burden of managing the case from you to your insurance provider.
Are there any errors and omissions exclusions?
An errors and omissions policy won't cover illegal acts or intentional wrongdoing, such as deceiving a client or violating a contract on purpose. It also won't cover conduct not related to your profession.
Additionally, E&O doesn’t cover claims covered by other types of business insurance. For example, cyber insurance covers you for data breaches and cyberattacks, while general liability insurance covers common business risks, such as customer bodily injuries and customer property damage. Neither of these policies includes E&O liability coverage.
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Updated: June 1, 2023
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