Companies that provide advisory and other services are at risk for lawsuits from unhappy clients claiming they have been harmed by the company’s actions or inactions. Errors and Omissions (E&O) insurance provides protection from these claims by helping cover court costs, as well as any settlements and judgments, for certain types of claims that may be brought against professionals and their companies.
Who Needs E&O Insurance
As error and omission claims are commonplace in corporate and professional America, insurers created E&O insurance, which is also called professional liability insurance, to protect against the cost of claims made against professionals and their businesses. Generally, E&O insurance is recommended for professional services firms such as law firms, financial advisory firms, insurance brokerages, architecture/engineering firms, certain contractors, real estate agencies, accounting firms, publishing companies, pet services businesses, and others. The policies not only protect the businesses themselves but the licensed professionals who are part of them.
What E&O Insurance Covers and Does Not Cover
E&O policies cover work errors and oversights, negligence, missed deadlines, underdelivered services, and inaccurate advice. They do not cover claims related to, for example, illegal activities, intentional wrongdoing, employee or customer injuries, business property damage, and employee discrimination or harassment.
Why E&O Insurance Is Needed
Even the most diligent and responsible professionals can be pursued or sued by unhappy clients. To make their case, claimants will need to establish that they suffered damages as a direct result of a professional’s work and that the work did not meet professional or industry standards or the terms of a contract. But even if the claim lacks merit, legal costs could run into the tens of thousands of dollars or more. If there is a settlement or a judgment, the total cost could grow to hundreds of thousands or millions of dollars, depending on the situation. Other costs, such as the time required to respond to a claim and the potential damage to a company’s reputation, can also mount. A small or startup firm could be put out of business by a single E&O claim.
For companies in certain industries, an E&O policy may be necessary to meet client expectations, to get work from clients or to compete for work in an RFP process.
Unlike other kinds of insurance coverage, an E&O policy can be customized to provide retroactive coverage from a date chosen in the past. A claim will only be covered if the incident not already known about occurred on or after the retroactive coverage date and the claim is filed within the policy period or any extended reporting period the policy provides for.
Factors Impacting Costs
E&O premiums vary widely based on a number of factors, including policy limits, claims history, location, industry and specific circumstances. A financial advisory firm that, for example, advises high-net-worth individuals on investing millions of dollars can expect to pay higher premiums than an advisory firm with lower exposure.
Different policies have different exclusions and complex wording, which insurance companies insert to limit their liability, or charge greater premiums for enhancing the coverage. It’s important to understand the details of the policy and its features to ensure it contains the protections that you and your business need.
If you have questions about E&O insurance or are involved in a coverage dispute with your insurance company, call us for assistance. We make insurance companies keep the promises they make to you and your business. Contact us today.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack