When is errors and omissions insurance required?

No matter how carefully you manage your books, review your contracts, vet your customers, or monitor your employees, you can't control everything. Errors and omissions insurance (E&O), also called professional liability insurance, protects your cash reserves when a mistake or oversight happens and a client sues.

Errors and omissions insurance also protects against accusations of negligence when your business is not at fault. In either case, E&O can help pay for attorney's fees, administrative costs, expert witness and consulting fees, court costs, and the eventual cost of a settlement or judgment.

Errors and omissions insurance can help pay your legal fees and other costs in the following scenarios:

• A client accuses your IT business of improperly installing software, which made them lose sales while the system was down. They sue you for damages.
• A client follows your advice about how to increase efficiency at their company, but the client ends up incurring more in costs. They blame you and sue for professional negligence.
• A simple typo on your calendar causes you to miss a crucial shipping deadline. The products don't make it to your customer in time, so they sue you for the cost of replacement goods.

Often, larger contracts or bigger, more sophisticated clients require your business to plan for contingencies by carrying E&O insurance to cover potential mistakes or mishaps. This policy provides your clients with peace of mind since they know your business could withstand a potential lawsuit.

Every industry involves different risks. In certain industries, the risk is so significant that an error or negligent performance on your part could severely impact your client's finances. To address these heightened stakes, some federal and state laws set minimum E&O coverage requirements for certain professions. Note that E&O is also called professional liability insurance or malpractice insurance, depending on the industry.

The following professionals are often required to carry errors and omissions coverage:

• Attorneys are often required by the state or their state's bar association to carry malpractice insurance or to report whether they do.
• Medical professionals – i.e., doctors, nurses, and therapists – are required to carry minimum amounts of malpractice insurance in most states. (Note: Insureon does not provide quotes for malpractice insurance.)
• Contractors working on government projects must carry insurance for "the perils to which the contractor is exposed," according to the Federal Acquisition Regulations (FAR) subpart 28.3.

Other laws indirectly touching your industry might make E&O coverage virtually required, too. For example, a mistake made by an accountant or a tax preparer could lead to legal action against a client, which necessitates a sufficient E&O policy.

Sometimes, entrepreneurs only buy E&O insurance when they need it to fulfill the terms of a contract. But when that particular job ends, they let the policy lapse, thinking they can just buy another policy later if the need arises.

There are two major problems with this approach:

Errors and omissions is a claims-made policy. That means for the provider to cover a lawsuit, the same policy must have been in place both at the time of the incident leading to the claim and when the claim was actually filed. So even if you've had multiple E&O policies in the past, you're really only protected during your most recent and active policy period.

For these reasons, it's best to get one E&O policy and keep it for the entire life of your business. Contact an Insureon agent to make sure you have E&O insurance that allows your business to secure large contracts, comply with legal regulations, and protect your company from litigation disasters.