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.
What is the legal basis of an errors and omissions case?
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:
- Your work failed to meet a client's reasonable expectations, industry standards, or obligations outlined in a contract.
- The plaintiff suffered damages.
- These damages are directly related to the fact that your work didn’t meet professional standards. If the plaintiff would have suffered damages regardless of your work, you aren’t liable.
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.
What situations can lead to an E&O lawsuit?
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.
What are some examples of errors and omissions lawsuits?
Example of breach of contract lawsuit
In 2019, fertility startup Celmatix sued genetic testing company 23andMe for over $100 million for breach of contract.
In the still pending lawsuit, Celmatix alleged that the two companies had entered into a partnership. Celmatix would pay for access to 23andMe’s customer data and research. In return, Celmatix would help 23andMe analyze that data.
The companies also planned to launch a fertility research community that would help collect genetic data on women who were trying to conceive.
While 23andMe and Celmatix had signed an exclusive partnership agreement, the lawsuit alleged that 23andMe broke the contract when they realized they were missing out on potential revenue opportunities. Once the deal fell apart, Celmatix claimed that it saw a decrease in its valuation, which forced them to lay off employees and suspend some operations.
Example of a lawsuit over a missed deadline
In 2019, car rental company Hertz filed a $32 million lawsuit against IT consultancy Accenture over a website that never went live. Hertz hired Accenture to redesign its website and develop related mobile apps. But the project was hit with multiple delays, and Hertz eventually pulled out of the deal.
Hertz claimed in the lawsuit that Accenture “failed to deliver the website and apps for which it was so generously paid.” It also alleged that the code for the website was poorly written and therefore a security threat. Accenture denied any wrongdoing.
The case has gone through multiple rounds in court. And no matter the eventual outcome, Accenture will have to pay significant legal fees.
Example of a professional negligence lawsuit
In a lawsuit filed in the New York State Supreme Court in August 2019, Walmart claimed that malfunctioning Tesla solar panels resulted in fires in at least seven Walmart stores.
The lawsuit alleged that “years of gross negligence” by Tesla and its subsidiary, SolarCity, caused the blazes, resulting in store closings and millions of dollars' worth of damaged merchandise.
Tesla CEO Elon Musk later said in a court deposition that he and Walmart CEO Doug McMillon spoke after the lawsuit was filed and “figured out a resolution.” The lawsuit was dropped in November 2019.
How can you reduce your business’s errors and omissions liability?
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.
How does errors and omissions insurance protect your business?
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:
- Lawyer’s fees
- Administrative expenses
- Court fees (filing fees, court reporter fees)
- Expert witnesses
- Settlement costs (settlement payments, mediation expenses)
- Court judgments
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.
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