Who Needs E&O Insurance?
Insurance is a vital part of any solid financial plan. It protects your business, your property, and your health. Some types of insurance, such as auto insurance, are beneficial and legally required. Insurance requirements protect those to whom you might cause damage. As a business owner, you may be required to have errors and omissions insurance to protect your customers. But what exactly is E&O insurance? How do you know if your small business needs it?
Read on for the answers to these questions and more.
What Is E&O Insurance?
E&O stands for “errors and omissions.” Whose errors and omissions does this refer to?
Yours, of course!
E&O insurance is professional liability coverage that protects business owners against negligent or inadequate work claims. Your E&O policy will protect you if a client ever sues you because they feel your product or service does not meet their standards.
What Does E&O Insurance Cover?
E&O insurance covers expenses associated with specific types of claims:
- Work errors
- Substandard work
- Breaches of contract
- Late or undelivered services
- Professional negligence
- Budget overruns
Legal expenses include court costs, legal fees, and legal defense costs. They also include any damages awarded to the client or judgments against you. Errors and omissions insurance coverage also pay for any settlements agreed upon through mitigation outside the courtroom.
What Does E&O Insurance NOT Cover?
E&O insurance does not cover the following types of claims (as well as some others, depending on your policy):
- Bodily injury
- Property damage
- False advertising
- Illegal actions
- Intentional wrongful acts
- Employee discrimination
- Wrongful employment practices
- Workers’ compensation
The types of claims listed above are covered by other insurance policies, such as general liability insurance, workers’ comp insurance, and commercial auto insurance. As a small business owner, you should have insurance policies to protect you from every potential claim. For claims to be covered by your E&O policy, you must make them while the policy is in place. However, this does not mean the alleged damages must have occurred while the policy was in place.
Some E&O insurance companies offer policies with retroactive coverage. This means that they will cover claims against mistakes made in the past. The exact retroactive date depends on the policy; it may be one year ago or several years back. A business owner’s policy should cover all employees to protect their company.
Who Needs E&O Insurance?
Any business that provides advice or services to its clients should purchase E&O insurance. Below is a list of the companies that need E&O insurance. Some are legally required to have it; others are strongly recommended due to the nature of their business.
Whenever you deal with others’ money or assets, you need protection. Clients who lose money often look for someone to blame, and the blame might fall on you. Even if the financial loss was entirely their fault (or at least no responsibility of yours), you might be the target of their frustrations.
This is why businesses providing financial services need a professional liability policy. Here are some examples of financial companies and professionals that could benefit from E&O insurance:
- Financial planners
- Investment advisors
- Real estate agents and brokers
- Insurance agents and brokers
The construction industry is another common target of E&O claims. Clients can be very particular about how their property is constructed and cared for. Every contractor has met at least one difficult client with unreasonable expectations. These are the very people who will sue you for things like missed deadlines.
Of course, there are times when unforeseen problems do put a hitch in the construction process. For this reason, construction professionals are wise to protect themselves with a solid E&O insurance policy. Here are a few types of construction professionals who would benefit:
- Maintenance Companies
Services meant to improve a business’s profits or growth can also be held liable for professional negligence. Your professional advice on running certain aspects of their business may be scrutinized, resulting in a claim against your business. If you fall into any of the following categories, you should consider getting an E&O policy:
- Advertising agencies
- Marketing research firms
- IT Professionals
Art is a very subjective profession. The value of a piece of art is very much in the eye of the beholder. Should a client hire you to perform an artistic service, you never know if they will be happy with the outcome. Even the most famous artists have individuals who are not fans of theirs.
So if you sell an artistic service or product, you should protect your business with E&O insurance. Otherwise, you leave your work liable to the whims of your customers. Here are some examples of professional artists who should consider an error and omissions insurance policy:
- Graphic designers
- Interior designers
- Wedding and event planners
- Photographers and videographers
- Landscape designers
Related: Do Artists Need a Business License?
Caretakers and Educators
When the welfare of loved ones comes into play, you can be sure that clients will be very particular. However, even perceived neglect can result in a big problem for caretakers and educators. Consider the very complex tasks included in these types of professions. For example, educators are not only responsible for helping to shape young minds but also for keeping them safe and healthy.
These types of caretakers and educators should strongly consider E&O coverage:
- Guidance counselors
- Social service workers
Many schools have insurance that extends to you as an employee of the school district, but this insurance may not offer complete protection if a claim is filed against you.
A client can hold your business liable for alleged errors even if you don’t accept service fees. This is why nonprofit businesses should arm themselves with E&O insurance. It may be hard to believe that a nonprofit organization would get sued, but unfortunately, this isn’t rare.
Business partners can sue nonprofits for contract breaches, and customers can sue for negligence. An errors and omissions policy protects a nonprofit organization on both sides. Read more about the types of insurance a nonprofit organization should invest in here.
Is E&O Insurance Required?
Most regulatory bodies require the professionals they oversee to have E&O insurance coverage. For example, in the financial sector, the Financial Industry Regulatory Authority (FINRA) requires all financial professionals to obtain E&O insurance before opening for business. In the real estate industry, requirements are determined by state laws. Visit this site to learn about your state’s regulations.
Most states require E&O insurance to get a professional construction license. You can learn more about this here. In addition, most businesses purchase a policy that covers all their employees. Check with your HR department if you are an employee in any of these industries and are worried about your coverage. E&O insurance can protect you from losing your business even if it isn’t required. Consider the value of this peace of mind.
How Much Does Errors and Omissions Insurance Cost?
The cost of an E&O insurance policy depends on a variety of factors:
- Company size and location
- Policy price
- Coverage limits
Your company’s workload also comes into play. The scope of work and the number of contracts you currently have determines your risk of claims brought forward.
Having quality control protocols in place to reduce this risk can help cut your policy’s cost.
Of course, you can expect a higher insurance quote if your claims history is extensive.
Read this short article to learn how much you can expect to pay for this coverage.
E&O Insurance vs. Malpractice Insurance
You’ve probably wondered about the difference between errors, omissions, and malpractice insurance. Both are types of professional liability insurance, but malpractice insurance protects legal and medical professionals.
- While professional liability and E&O are interchangeable regarding business insurance, professional liability, and malpractice are not.
- Typically, malpractice insurance is a much higher expense because of the responsibilities carried out by medical and legal professionals.
What to Do If an E&O Claim Is Filed Against You?
Getting your first claim filed against you can be a scary experience. Luckily, E&O coverage gives you access to an insurance agent who will help you understand the process. Of course, it is best to be prepared before a claim is filed to ensure you don’t make any significant mistakes. So, here are a few things you should do if you’re facing a lawsuit:
Face the Problem
First things first: never ignore a claim hoping it will go away. It won’t, and the longer you avoid it, the harder it will be to resolve the matter.
Contact Your Insurer
Report your claim to your E&O insurance provider when you receive it. Forward the claim letter or document to them with all pertinent information.
Under no circumstances should you discuss the case with anyone outside of the need-to-know realm. This small group includes your insurer, business partners, and any employees involved in the claim.
Meeting with all the employees and assigning one as the claims coordinator is an excellent idea. Their job is to ensure everyone is on the same page and has shared any information they have in their files concerning the case.
It can be easy for your emotions to get the better of you when you are accused of wrongdoing. Try to keep your personal feelings out of it.
Avoid Your Client
The time to reconcile things with your client is well and gone. You should no longer discuss the details of this case with them. All communication should happen through your legal representative.
Don’t Admit Guilt
Never admit liability to anyone — not even your lawyer.
Errors and omissions coverage can mean the difference between the success of your business and a quick end to your career.
The professionals listed in this article are at risk of the latter without an E&O insurance policy.
Every business wants to save money, but some expenses are too significant to cut. Insurance protection is one of these necessary expenses, so protect yourself.
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