What Is Errors and Omissions (E&O) Insurance?
Errors and omissions (E&O) insurance is a type of professional liability insurance that protects companies, their workers, and other professionals against claims of inadequate work or negligent actions.
Key Takeaways
- Errors and omissions insurance is a form of professional liability insurance.
- E&O insurance protects companies and professionals against claims of inadequate work or negligent actions made by clients.
- Anyone who provides a service requires E&O insurance including financial services, insurance agents, doctors, lawyers, and wedding planners.
- E&O insurance does not cover criminal activity. It also does not cover many other forms of damage that are traditionally covered by different forms of insurance.
- E&O insurance costs will vary based on industry and projected risk; most companies can obtain coverage for less than $1,000 per year.
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Understanding Errors and Omissions (E&O) Insurance
Errors and omissions insurance is a form of liability insurance. It protects companies against the full costs of a claim made by a client against a professional who provides advice or a service such as a consultant, financial advisor, insurance agent, or lawyer. It is a common form of business insurance that protects an entity should someone accuse that company of making a mistake.
Companies often obtain E&O insurance if they provide services to a customer for a fee. This form of insurance can be obtained from many major commercial insurers. Companies run out of a home-based office must buy a separate policy; the company can't get errors and omissions insurance under a homeowner's policy.
What E&O Insurance Covers
The benefits E&O insurance gives companies or individuals vary greatly depending on the policy and issuing insurance company. Broadly speaking, E&O insurance covers:
- Errors, mistakes, or oversights incurred during the course of work.
- Failure to meet a deadline or deliver a specific service promised to a customer.
- Professional negligence.
- Failure to meet a specific standard of care, especially if outlined by a given profession.
- Breach of contract.
Regarding specific expenses, E&O may cover legal and court costs should a company find itself in court. Attorney and other legal fees are often covered whether or not the company is found to be guilty of the matter at hand. E&O may cover specific types of settlements of judgements in which the company is found at fault. It also covers damages and expenses incurred to others for wrongdoing.
Some E&O policies are not geographically bound and may still cover work performed outside of the company's primary country of operation. Check to see whether an international professional policy would be a better fit for your business.
What E&O Insurance Does Not Cover
These policies do not cover criminal prosecution and certain liabilities that may arise in civil court not listed in the policy. This includes illegal acts, intentional deeds of wrongdoing, or criminal activity. E&O insurance often does not cover bodily injury inflicted by your business as that is typically covered by general liability insurance.
E&O insurance may or may not cover temporary employees, claims stemming from work done before the policy was in force, or claims in various jurisdictions. It may also not cover information leaks due to cybercrime, employee injuries, or discrimination claims. These last three situations are covered by different types of insurance.
Who Needs E&O Insurance
Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract. This kind of liability insurance is generally required for professional advice-giving or service-providing businesses. Without E&O insurance, a company can be held liable for up to millions in damages plus the fees associated with a legal team.
Insurance brokers, insurance dealers, realtors, registered investment advisors, financial planners, and other financial professionals can obtain E&O insurance. Regulatory bodies, such as insurance regulators, the Financial Industry Regulatory Authority (FINRA), or even a company's investors will often require E&O insurance.
E&O insurance is also applicable to businesses outside the financial industry including nonprofits, general maintenance companies and contractors, and engineering firms. Any other company or professional who provides a service, such as wedding planners and printers, also needs E&O insurance. Doctors, dentists, and other medical professionals also take out E&O insurance called malpractice insurance.
For example, a client may sue an advisor or broker after an investment goes sour, even if the risks were well-known and within the guidelines established by the client. Even if a court or arbitration panel decides in favor of a broker or investment advisor, the legal fees can be very high, which is why E&O insurance is important.
E&O Insurance Cost
The cost of a policy depends on a number of factors including the kind of business covered, its location, and any previous claims that have been paid out in the past. A person or company with numerous litigation problems has a higher underwriting risk and is likely to find E&O insurance more expensive or less favorable in its terms as a result. On average, E&O insurance can run around $500 - $1,000 per employee, per year.
Companies can often obtain an E&O policy quote in minutes.
Example of E&O Insurance
Let's say a company that hosts servers used by third parties for data purposes is breached by hackers who gain access to proprietary information and client data. The companies affected by the hack then sue the server-hosting company for damages for inadequate security.
The server-hosting company has an E&O insurance policy and reviews it to see what the policy does and does not cover. To the company's benefit, its errors and omissions policy is robust and covers such situations. The insurance company pays for the legal expenses involved in the court case against multiple companies. It also pays for any monetary damages rendered by the courts or settled in arbitration.
Having errors and omissions coverage helps the company avoid a substantial financial hit—even bankruptcy—depending on the company's finances. If you or your employees are in the business of providing professional advice or other professional services, E&O insurance could be worth your consideration.
Who Needs Errors and Omissions (E&O) Insurance?
Professionals working in financial industries such as insurance, investments, real estate, and accounting will benefit from E&O insurance to cover them in the event of a mistake or omission made on behalf of a client, which can be costly. Many regulatory bodies mandate employees in these professions to obtain E&O coverage through their employer or independently.
Why Is Errors and Omissions Insurance Important?
A client can sue a financial professional if they incur a loss due to an error or omission made during an application process, consultation, or investment decision. E&O insurance covers legal fees and any damages awarded to the client if they are owed.
Is E&O Insurance Expensive?
E&O costs will depend on a variety of factors, including the nature of the business, size of the company, and claims history, On average, E&O can cost between $500 and $1,000 per employee for a given year.
Is E&O Insurance the Same as Liability Insurance?
E&O insurance is the same product as professional liability insurance. However, E&O insurance is different from general liability insurance. E&O is coverage specific to mistakes performed specific to the operations of a business, while general liability insurance is more suited towards coverage for a company involving claims for bodily injuries or damages inflicted by the company's products.
The Bottom Line
E&O insurance is a form of coverage for a company regard mistakes performed during the course of business. When a company legitimately fails to meet a deadline, make a material omission, make a professional oversight, or incur professional negligence, the injured party may make a claim against the company. In these situations, the company may have insurance coverage to pay legal and damage expenses.
