Error and Omission Insurance (E&O) is a type of professional liability insurance that protects companies, their employees, and other professionals against inappropriate work claims or negligent actions.
E&O scenario example
Jane owns a yoga studio called Lotus. Jane has secured her business with a standard Commercial General Liability (CGL) policy. She did not purchase insurance for errors and omissions because she did not think she needed it.
One day, Jane is shocked to receive a letter from a lawyer informing her of a lawsuit against her business. The plaintiff is a former yoga student named Marta. Marta claims she was seriously injured six months ago while taking a position at one of Jane’s yoga classes. She was doing the position Jane had taught her. Unfortunately, Jane’s technique was wrong. Her incorrect instructions caused Marta to suffer a spinal injury that required surgery. Marta seeks $40,000 in damages.
Jane’s trial will not be covered by Lotus’ CGL policy. Marta claims that her injury was caused by Jane’s negligent instructions. She is not claiming compensation for damage caused by a slip and fall or a similar accident that occurred inside the studio. Instead, her lawsuit is based on allegations that Jane failed to provide the level of training Marta expected.
Because Jane does not have E&O insurance, she will have to pay the damages out of pocket. She will also have to pay the cost of hiring a lawyer.
How Much Does Errors and Omissions Insurance Cost?
There are a few factors we need to consider when we are talking about the cost of Errors and Omissions Insurance. A great contributing cost factor is the size of the business. Also, the type of profession will affect the price.
Some other factors that will influence the cost of Errors and Omissions Insurance include:
- rates of the insurance company you choose;
- E&O claims history;
- manuals in place;
- number of employees;
- type of business.
Though, the average cost of an Errors and Omissions Insurance for a company with 10 employees or fewer would be around $1,750 per year, the costs can start from $900 and go up to $2,000. This is why it is recommended to ask for price offers from multiple insurance companies.
Errors and Omissions Insurance Overview
Errors and Omissions Insurance is also known as Professional Liability Insurance and it protects small business owners from the following:
- omitting to explain to the clients the risks and dangers of the professional advice offered;
- not performing professional duties;
- claims of negligence.
Errors and Omissions Insurance often covers both court costs and any settlements up to the amount specified in the insurance contract. This type of liability insurance is generally required for companies that provide professional advice or services. Without E&O insurance, a company can be held liable for damages of up to millions of dollars plus fees associated with a team of lawyers. E&O insurance helps mitigate or eliminate these potential debts.
Who Needs Errors and Omissions Insurance?
It is very easy to be sued in today’s litigious society. If you have a business or profession which works with or gives advice to people, it is even easier to be sued. You will need Errors and Omissions Insurance if you are involved in one of the following professions:
- Financial Advisors;
Any business that offers advice or service for a fee can be sued. It is very easy for a client to say that you haven’t fulfilled your professional duties. And just like that, you are in court fighting for your company’s finances and reputation.
For example, a client may sue an advisor or broker after an investment is impaired, even if the risks were well known and in accordance with 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.
What is covered by the Errors and Omissions Insurance?
The Errors and Omissions Insurance policies offer their holders protection against:
- Punitive damages;
- Negligent acts;
- Court costs;
- Copyright infringement;
- Personal injury
- Bad financial or legal advice.
However, every insurance company that offers Errors and Omissions Insurance has its own package that includes unique coverage.
What is not covered by the Errors and Omissions Insurance?
Errors and Omissions Insurance will not offer coverage in case of:
- Trade and patents secrets;
- False advertising;
- Workers’ compensation claims;
- Property damage and/or bodily injury;
- Employers’ liability claims like child molestation or sexual harassment.
Errors and Omissions Insurance Limit Options
It is very important to know what you are paying for when you buy Errors and Omissions Insurance.
- Aggregate limit: it is the maximum value that your insurance company will pay in total while the policy is active.
- Occurrence limit: it is the maximum value that your insurance company will pay you out for any type of claim made on your policy resulting from one event, no matter the number of injured individuals.
The Errors and Omissions Insurance limits are established the same way as auto insurance limits of $100,000/$300,000. The usual policy limit will be something like this:
Aggregate/Occurrence – $2 million/$1 million.
Types of E&O policies
Many E&O policies are designed for certain types of professionals. For example, medical malpractice policies are for physicians, while E&O policies for architects and engineers are designed for design professionals.
If a sector-specific form is not available, an insurer may provide E&O coverage using a miscellaneous professional liability policy. This non-specific E&O policy form is often used to provide coverage for “non-traditional” professionals, such as consultants, travel agents, and construction managers.