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When is errors and omissions insurance required?

Federal and state laws mandate errors and omissions insurance for certain professions. Small businesses may also need it to fulfill the requirements of a client contract or a licensing body.

E&O insurance: A key risk management tool

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.

E&O provides coverage for professional mistakes and oversights

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.

Is E&O insurance required by client contracts?

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.

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E&O may be regulated by law in your industry

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.

Examples of professionals required to carry E&O insurance

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

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.

How your claims history affects E&O insurance rates

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:

A history of short-term policy buying makes it increasingly harder to get the next E&O policy

Insurers balance the premiums they receive over the length of the policy against the large payouts when something goes wrong. Because short-term, buy-and-drop tactics upset that balance, you might find yourself uninsurable and completely exposed.

E&O insurance is a claims-made policy

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.

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