Errors and Omissions Insurance Explained
If you are a business owner or a professional like a doctor or an attorney, you might want to consider buying errors and omissions insurance. In this post, we’ll explain all about errors and omissions so that you are clear about how it works, what it covers, who it’s intended for, its availability in different states, coverage, and more.
What Is Errors and Omissions Insurance (E&O)?
Although there are many errors and omissions insurance definitions that you can find on the internet, we’d like to keep things simple. E&O is a type of professional liability insurance for professionals, companies, and their workers.
This professional liability insurance can protect you against claims of negligent actions and inadequate work.
Understanding Errors and Omissions Insurance (E&O)
As this is a type of liability insurance, it’s suitable for those professionals who provide advice or service. The errors and omissions insurance covers court costs and settlements. The coverage is up to the amount that is specified by the insurance contract.
Without the errors and omissions insurance policy, you and your company can be held liable for up to millions of dollars in damages, in addition to the legal fees that your lawyer may charge you to defend your case. In simple words, you can eliminate and mitigate potential liabilities easily with E&O insurance.
The E&O insurance can help cover:
- Attorney fees up to $150,000
- Court costs like expert witness payments and courtroom reservation
- Administrative costs like paying the court reporters and office managers
- Settlements and judgments
So, whether you’re an insurance broker, lawyer, consultant, financial planner, or investment advisor, E&O insurance provides essential protection against liability risks. In addition, regulatory bodies like FINRA (Financial Industry Regulatory Authority) often require E&O.
Dentists, doctors, and medical professionals take out errors and omissions policy known as malpractice insurance.
Who Is Errors and Omissions (E&O) Intended For?
It’s intended to protect all those professionals offering specialized and advisory services. The wide range of businesses and industries that need E&O insurance include:
- Advertising agencies
- Engineering firms
- Accounting and financial institutions
- Security companies
- Wedding planners
- Medical professionals
- Insurance brokers and agents
Simply stated, errors and omissions insurance should be considered by all those businesses that sell products and services where customers can find fault with the quality standard or care received.
Errors and Omissions Claims Examples
Let’s look at errors and omissions claims examples to develop a better understanding of this type of insurance.
Errors and omissions insurance for insurance agents may be beneficial as they are in the business of selling policies. For instance, suppose an agent sells a client a policy that happens to fall short, thereby leaving the client vulnerable to liabilities. At this stage, the client may file a lawsuit against the agent. This is where E&O insurance comes into action.
Similarly, another example is a tax agent who provides tax preparation services. Clients can file lawsuits in case of accounting errors and lost documents. In such a situation, E&O insurance can protect the agent from lawsuits.
It’s crucial to understand that errors and omissions insurance will only help cover a claim if:
- You file it during your policy period or the extended reporting period.
- The incident happened on or after your retroactive date. Retroactive date means that the incidents that occur on or after this date are eligible for coverage.
E&O Insurance in the Different States
E&O isn’t mandatory in all states. However, if you are a professional, it’s best to get E&O insurance coverage against expenses associated with common mishaps. Here’s a quick overview of the states where E&O insurance is required or not required.
|State||Errors and Omissions Insurance Requirement|
|Errors and Omissions Insurance California||No|
|Errors and Omissions Insurance Texas||No|
|Errors and Omissions Insurance Florida||No|
|Errors and Omissions Insurance Colorado||Yes, real estate businesses are legally required to have at least $100,000 in liability coverage and a minimum annual aggregate limit of $300,000.|
|Errors and Omissions Insurance TN (Tennessee)||Yes, it’s required for timeshare salespersons, real estate brokers, and affiliate brokers.|
Is Errors and Omissions Insurance Legally Required?
No, it’s not legally required in all states. However, some professionals are required by regulatory boards to carry errors and omissions coverage. In addition, some states require real estate agents to show proof of E&O insurance coverage before they receive their licenses. These include:
- North Dakota
- Rhode Island
- New Mexico
Here are some businesses that should carry E&O insurance as they are at a high risk of getting sued by unsatisfied clients:
- Advertising agencies
- Graphic designers
- Technology professionals
- Travel agents
- Interior decorators
- Management consultants
- Business and financial consultants
- Tax preparers
How Much Does Errors and Omissions Insurance Cost?
To begin with, the cost of errors and omissions policy varies depending on a variety of factors, such as:
- Business size
- Number of employees
- Business revenue
- The industry and the types of risks you face: you will have to pay more expensive rates if you work in a high-risk industry.
- Business location: rates are likely to vary depending on where your business operates. For example, if you are located in a busy city, you will have higher errors and omissions insurance costs.
- Your past business claims: if you have a history of liability claims, you may pay more for E&O insurance.
- Errors and omissions coverage limits: the higher your insurance policy limit, the greater coverage you will have. However, it means higher premiums.
In general, the median cost of E&O insurance is approximately $59 per month, which is approximately $713 annually. Besides, did you know that approximately 51% of small business owners pay between $500 and $1000 annually for their errors and omissions policies, and about 18% of small business owners pay less than $500?
If you think that the cost of the errors and omissions policy is high, then there are many ways to keep it down. However, before we share the ways you can curtail the cost, let us tell you something. Regardless of the E&O insurance price, it’s worth paying the premium because you never know when you might need coverage to protect yourself and your business against the lawsuit filed by a client.
Here are a few ways to pay less on E&O and still receive the protection you need:
- Shop for multiple quotes
- Choose an agent who specializes in your industry
- Keep your claims history clean
- Opt for higher deductibles
In addition, the best way to protect your business against E&O claims is to strive to deliver high-quality services. You can achieve this by:
- Consistently train your employees to ensure they keep abreast of the latest standards and procedures.
- Check your contracting system for quality control.
- Communicate with customers regularly to ensure they are satisfied.
What Does Errors and Omissions Insurance Cover?
Now that you know how much E&O insurance is likely to cost, let’s take a deeper dive into coverage options.
Accidents and mistakes can happen to anyone. However, when they occur to a professional, there is a risk of being sued by customers for different reasons, such as:
- Errors in provided services
- Violation of fair dealing and good faith
- Inaccurate advice
- Mistakes made by contractors
- Missed deadlines
- Breach of contract
- Failure to deliver a service
If your business faces any of these situations, your errors and omissions insurance is likely to cover the following:
- Damages, such as judgment and settlements that result from the lawsuit
- Legal defense costs, including attorney fees and court expenses
- Disciplinary proceedings called by regulatory, licensing, and other government agencies
- Loss of income due to the time you spend at trials and depositions
What Your Errors and Omissions Insurance Policy Doesn’t Cover?
Though errors and omissions provide adequate coverage against lots of lawsuits and risks, there are certain things that it doesn’t cover, such as:
- Employment practices like harassment and wrongful termination. To cover these claims, you will need employment practices liability insurance.
- Purposeful wrongdoing or illegal acts. These include fraudulent actions and dishonest behavior.
- Stealing intellectual property.
- Bodily injury caused by your business. If a client gets injured on your business premises, you’ll need general liability insurance.
- Property damage caused by your business.
- Illnesses or work-related injuries to your employees. Workers’ compensation insurance will cover these claims.
- Personally identifiable information that is stolen or lost. Data breach insurance will cover these costs.
How Much E&O insurance Do I Need?
As every business is unique, your coverage needs will differ from another business owner looking for errors and omissions insurance coverage. The amount of professional liability insurance coverage you need depends on the level of risk and other factors discussed above. The idea of shopping for this coverage is to protect you and your business from financial loss due to third-party claims and civil lawsuits.
It’s always better to have some form of E&O insurance policy than to have nothing at all. This is because an errors and omissions claim leads to chaos and uncertainty in numerous ways. Imagine how employee productivity and performance may decrease if employees carry the burden of trying to perform their duties error-free because the company doesn’t provide insurance protection.
The pressure and stress can lower their morale dramatically. In addition, it can be overwhelming for everyone, employees and management alike. In other words, the price of an errors and omissions policy is not as steep as the potential cost you are likely to incur by not having one in place.
Regardless of how experienced you are or how tactfully you manage your work and books, review contracts, vet customers, and monitor employees. You can’t have everything under your control. This is why it makes sense to shop for errors and omissions insurance, which protects your cash reserves if you make a mistake and your client sues you.
Moreover, it also protects you from accusations of negligence. Plus, you can use it for paying legal fees, administrative costs, consulting fees, court costs, and expert witness fees.
Is E&O the Same as a Professional Liability?
Yes. There is no difference between these two coverage options. They are the same and interchangeable. Depending on the type of business, you may hear the term professional liability for errors and omissions insurance. In addition, in the medical industry, professional liability is called malpractice insurance.
Regardless of what it‘s called, professional liability or E&O insurance, it provides coverage to you and your business if you make a work mistake. Hence, if a client sues you, the insurance coverage will pay for the legal defense.
How Much Is E and O Insurance for Notaries?
Notary public E&O insurance protects the notary when a mistake is made while fulfilling the notarial role, causing the client to suffer financial loss. Here it’s essential to understand that a notary bond will not protect you. It will only cover your customers. However, for your protection, you will need E&O insurance.
When it comes to E&O coverage, you can choose a coverage amount depending on your business needs and risks. In general, policies up to $25,000 and $50,000 are common.
Also, the median annual cost of errors and omissions insurance is $60 per month. However, the price varies, depending on the coverage level you choose.
Why Is Errors and Omissions Insurance Important?
In today’s increasingly litigious environment, entrepreneurs simply can’t afford to leave themselves open to claims and lawsuits that arise from the inevitable and costly human errors. Moreover, should that error create defects in the product or service, it can hold you liable for monetary damages and fines that your clients may incur as a result. Therefore, you must shop for E&O insurance coverage.
Instead of facing costly lawsuits because a particular investment flops or clients don’t get the returns as expected, the E&O coverage can provide the protection you need to continue your business operations without bringing it to a standstill.
Apart from this, if you don’t have E&O insurance, you may lose potential investors. Many investors prefer to work only with companies that carry errors and omissions insurance. Hence, if you don’t own E&O coverage, they may not consider your company for investment.
So, if you are in a service industry, it’s advisable to carry errors and omissions insurance. Since this is critical and expensive insurance, we recommend you do some research. First, check the market and get quotes from different insurance providers. Then, evaluate your options to find the right coverage within your budget.