Errors and Omissions Insurance
A Complete Guide for 2023
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Starting a business and keeping it running smoothly can be a challenging process that involves a lot of risks and unforeseen difficulties. One of the biggest risks that businesses face today is liability litigation resulting from client lawsuits and claims.
Liability lawsuits can put a huge financial strain on businesses. A prolonged legal process can even lead them to bankruptcy. If you want to safeguard your business, errors and omissions insurance (E&O insurance) is definitely something to consider.
Not sure how to go about finding the right E&O policy? Get started by reading our complete errors and omissions insurance guide.
What is Errors and Omissions (E&O) Insurance?
Errors and omissions insurance helps protect you from lawsuits alleging you’ve made mistakes that have adversely affected a client or customer. It can cover court costs or settlements, which can be extremely expensive.
In the U.S., attorney charges can cost anywhere from $3,000 to $15,000 or higher. Moreover, a settlement can cost your business millions of dollars. Even if your client decides to drop their claim, your business can still incur thousands of dollars in legal expenses.
According to The Zebra, on average, 36% to 53% of small businesses face lawsuits every year in the U.S. An average liability lawsuit costs at least $54,000. Businesses need to invest in errors and omissions insurance to shield themselves from these huge financial burdens resulting from client lawsuits.
Who Needs E&O Insurance?
All businesses, no matter their size, have to deal with different kinds of risks. While the degree of risk involved might vary depending on the nature of the profession, all businesses should consider getting E&O insurance as a part of their risk management strategy.
But service-oriented businesses that cater to clients’ needs or provide professional consultation are particularly exposed to legal claims. For such businesses, E&O insurance ais practically mandatory.
Businesses and professionals that require E&O insurance include:
- Real estate firms and agents
- Insurance agencies
- Medical practitioners (doctors & nurses)
- IT professionals
- Engineers & Architects
- Handymen & electricians
- If your business provides any kind of service or consultation, you should consider getting the right E&O insurance.
What does E&O Insurance Cover?
Errors and omissions insurance policies may cover a wide range of things, such as:
Work mistakes and inaccurate advice
Whether you’re an attorney, real estate professional, or doctor, E&O insurance can help cover the costs of legal defense and settlements, as well as any damages that may be awarded to your client. For example, doctors and lawyers can be sued for malpractice, or an engineer can be sued by a client if any structural issues are found in a building.
E&O insurance also covers lawsuits against erroneous consultation. If a real estate agent fails to mention important, undesirable details about a property, the buyer can file a claim against the firm for negligence. Similarly, an accountant can be sued by clients for providing inaccurate financial advice or faulty consultation.
E&O insurance is crucial in such situations to cover legal defense and settlement costs.
In some cases, you may not be able to deliver the services that your client is expecting, and they may hold you responsible. For example, if you’re an event planner and the venue for your client’s event cancels at the last minute, you may be expected to find a new venue and ensure that the event goes off without a hitch, even if it’s impossible to meet your obligations at that point.
Breach of contract
If you fail to live up to the terms of your contract with a client—for example, if you deliver subpar work or fail to complete a project on time, you may be held liable for not fulfilling the terms of your contract.
If you’re working on a project with a hard deadline and you miss it, your client may claim to suffer financial damages as a result. Imagine you’re tasked with creating a website for a client who needs it up and running by a certain date, and you miss that deadline. The client may blame you for lost business opportunities.
If a client or customer believes you failed to provide the level of care that a reasonable person would expect in your profession, they can sue you for professional negligence. If you’re a doctor and you make a mistake during surgery, or if you’re an accountant and you make an error in your client’s taxes, you could be held liable for any resulting damages.
What Does E&O Insurance Not Cover?
E&O Insurance is designed to protect professionals from risks arising out of the performance of their services. The coverage is limited to allegations of negligence and does not extend to other areas, such as fraud or failure to perform.
There are a number of specific exclusions that are generally found in E&O policies. These include:
Bodily injury or property damage
Prior knowledge of a problem with the product or service being provided
War and terrorism
Work performed outside the scope of the policy
How Does E&O Insurance Works?
E&O provides protection against two major risks: loss or damage you may cause due to negligence in your business process, and the risk of frivolous lawsuits that can land you and your business in trouble.
If a client sues you or your business for any of the previously mentioned reasons, your E&O insurance can pay for:
- Legal fees
- Court fees
- Administrative costs
- Penalties and fines as per the jury or judge
- Settlement fees
How to File an E&O Claim?
Filing an E&O claim might seem like a complicated process, but it’s actually fairly easy if you follow the steps below:
- Submit the verified information about the claim to your insurance provider as soon as possible. Most insurance policies come with a time period limit for filing claims. Hence, make sure you file your claim on time.
- Consult with your insurance provider to find a lawyer that specializes in E&O claims. The lawyer will verify the information and enquire about the parties involved.
- Work with the lawyer and your insurance carrier to reach a settlement agreement with the client who filed the claim. Your E&O insurance will cover the settlement amount.
- If you cannot reach an agreement outside of court, the claim will go to trial. Your E&O insurance will cover the legal defense costs. The jury will provide the final verdict on whether the client will receive a settlement or not. The settlement amount will be decided by the court.
Understanding Retroactive Date in E&O Insurance
Retroactive date is an important concept for claims-made insurance policies such as E&O insurance. It determines whether the policies that occurred in the past will be covered by your current policy or not.
Also, businesses must ensure that there is no gap between the policies to expand their safety net and for coverage of losses that occurred in the past.
Businesses that have been getting continuous coverage can ask insurers to set the retroactive date to the earliest date from which you have been insured and not the new policy inception date.
For new policies, the retroactive date is the same day your policy started.
Are E&O, Professional Liability, and Malpractice Insurance the Same?
Insurance lingo isn’t always easy to understand and things become more confusing when multiple names are used for a policy. Such is the case with E&O insurance. When it comes to insurance terminology, it’s best to be informed before purchasing a policy.
If you search for business liability insurance options, you are likely to come across three different terms: E&O (errors and omissions) insurance, professional liability insurance, and malpractice insurance.
Are these policies the same? Yes, pretty much so. All three policies are designed to protect businesses and professionals from lawsuits and financial damages due to errors or –omissions—things that shouldn’t have taken place, but did while providing service to their clients.
The term “E&O insurance” is generally used by professionals in the real estate, accounting, IT, and insurance field. “Professional liability insurance” is used by engineering and consulting professionals, while “malpractice insurance” is mainly used in regard to attorneys. physicians and healthcare professionals.
These policies have the same basic purpose, but their costs vary according to the type of profession you are in and the degree of risk associated with it.
Should You Buy Errors and Omissions Insurance?
Almost every profession that provides services to clients or customers can benefit from E&O insurance. It is commonly understood that those in the financial field in particular require the policy. However, everyone from handymen to electricians to medical professionals and lawyers need E&O insurance.
It’s important to note that even if E&O insurance is not mandatory by law throughout the U.S., many states have federal E&O coverage requirements for professions that involve significant risks. For instance, certain states require real estate businesses, lawyers, and medical practitioners to have this coverage.
Make sure you check out the legal insurance requirements of a particular state before you do business there.
|States Where E&O insurance is mandatory for the Real Estate Businesses||States Where E&O insurance is Mandatory for Medical Professionals|
Many states require attorneys to inform their clients beforehand if they don’t have malpractice insurance.
We strongly recommend that all businesses and professionals invest in a proper E&O policy even if it is not mandated in your state. Without that protection, financial expenses resulting from lawsuits can have a crippling effect on your business.
Things to Remember
Once you purchase an errors and omissions insurance policy, you can rest assured that your business and professional pursuits will be protected against lawsuits and litigation. But there are additional measures you should take. For instance…
Always have documented back-up. Whether it concerns conversations with your clients, or service-related notes, you should preserve the information in a written format. This way, you can go back to the written facts concerning the service/sales if you need to confirm anything with your client later on. It can also serve as powerful evidence in your favor if at any point you face a lawsuit.
Effective Communication and Transparency
Clear communication can protect your reputation and business from errors, and claims against those errors as well. Whenever you deal with clients or customers, make sure each of you understand what the other is saying or referring to. Don’t be afraid to overexplain things. You want to do your best to avoid misunderstandings that can lead to lawsuits down the road.
Remember that you can’t always be right. If you face any confusion during the course of providing a service to your client, it’s best to seek assistance from someone you know to have a better grasp of the matter than you do. If you aren’t aware of anyone who can help you out, then it’s best to inform your client and stick to what you confidently know.
These are some of the important facts about E&O insurance that businesses must understand before getting insurance. Keep in mind that E&O insurance limit requirements can vary depending on the risks involved and the scale of the business.
It’s important to consult with an E&O insurance expert or an agency to get the right coverage. To learn more about errors and omissions insurance, reach out to us and get matched with top agents to get the right coverage.
- What is Errors and Omissions (E&O) Insurance?
- Who Needs E&O Insurance?
- What does E&O Insurance Cover?
- What Does E&O Insurance Not Cover?
- How Does E&O Insurance Works?
- How to File an E&O Claim?
- Are E&O, Professional Liability, and Malpractice Insurance the Same?
- Should You Buy Errors and Omissions Insurance?
- Things to Remember
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