If you are a business owner, or have a career in professional services, you may be familiar with errors and omissions insurance, also known as E&O insurance. Undoubtedly, E&O insurance is something good to have.
E&O insurance helps reduce your overall risk exposure and liability, and can come in handy during a lawsuit. What is E&O insurance, and how much E&O insurance do you need? We’ll address that in greater detail below.
How Does E&O Insurance Work?
E&O insurance is a type of liability insurance. This insurance protects a company, or an individual, against a lawsuit.
Lawyers, financial advisors, professional consultants, insurance agents, accountants, real estate agents, engineers, developers, architects, and even lenders can all have a need for E&O insurance. In the event any of these professionals, or their company, make a mistake while working with their clients, errors and omissions insurance can absorb, or reduce, the amount a client could sue for.
What Does Errors and Omissions Insurance Cover?
E&O insurance has a specific scope of coverage. Most commonly, E&O insurance will cover the insured when:
- The insured individual or company is being sued for giving the wrong advice to their client. For example, if a lawyer advised their client they are legally allowed to do something, or they will receive something, and that guidance was incorrect, the client has a right to sue the lawyer for misleading them. If the lawyer had E&O insurance, the lawyer would likely be personally protected, and the insurance policy would kick in.
- If a deadline is not met, and the client faces a financial fine or negative ramification due to the missed deadline, whoever hired you, may come after you. E&O insurance would step in and help settle this claim without holding you personally liable.
What Doesn’t Errors and Omissions Insurance Cover?
Believe it or not, there are more things that fall outside of the coverage area than what falls inside. Errors and omissions insurance does not cover:
- If someone falls on your business property and gets injured E&O insurance will not step in and cover that claim. This falls more so under general liability insurance.
- Errors and omissions insurance is also not auto insurance, even if your vehicle is for business use only.
- If something is stolen from your business, or if your property is damaged, errors and omissions insurance does not provide any coverage for lost or damaged claims.
- If you intentionally gave inaccurate advice, and the insurance company can prove that, your E&O insurance policy will not cover the claim. This is for errors only, not deliberate intentions.
- Criminal activity is also not covered under any errors and omissions insurance policy.
How Much E&O Insurance Do I Need?
How much E&O insurance do I need is one of the most commonly asked questions regarding this topic. What you need is dependent on numerous factors, such as the industry you’re in, and the amount of risk associated with being held liable for a claim.
If you are a lawyer advising high net worth individuals, a simple mistake can cost them millions of dollars, and they can certainly hold the lawyer accountable for that loss. In that example, that lawyer advising high net worth individuals will need more E&O insurance than a lawyer who works in a relatively low risk industry or practice.
How Much Does E&O Insurance Cost?
If you’re curious how much E&O insurance costs, unfortunately, this answer isn’t as straightforward as you may be hoping for. The cost is entirely contingent on a few key factors.
First and foremost, how big is the business? If you are a law firm with 100 lawyers, E&O insurance will be considerably more expensive than a law firm with 5 lawyers.
Secondly, the profession also influences the cost. Some industries are subject to higher risks or higher claims. Those industries typically pay more for this insurance.
Just like a homeowners policy, you pay for what you get or insure. If you want to protect your business against a $500,000 liability, that insurance will cost less than if you went with a $5,000,000 policy.
Last but not least, your claims history will also play a role in determining your cost. Similar to car insurance, if you have a history of accidents (or tickets), you are riskier in the eyes of the insurance company. Therefore, they will charge you more for the coverage.
Why Is E&O Insurance Important?
Errors and omissions insurance is critically important for those professions that are impacted by it. Why? Because a simple mistake can cost your client a great deal of hardship or money.
Protecting yourself against being personally accountable financially for that mistake is vital. A single lawsuit can take away all your assets, and leave you with a great deal of debt and pain.
Who Needs E&O Insurance?
There are plenty of professions that need E&O insurance. Most commonly, the following professions would all carry E&O insurance:
- Business consultants
- Real estate agents
- Mortgage lenders
- Insurance agents
- Financial advisors
- Real estate developers
How Do E&O Claims Work?
An E&O claim is very similar to an auto insurance claim. If you (the insured) receive notice that you are being sued by one of your clients for an error you made while advising them, you would contact your insurance company.
More than likely, this claim would be taken to court, at which point the E&O insurance company would step in and help absorb the cost of the lawsuit if in fact it was covered under the policy you have with them.
How Do I Avoid E&O Claims?
The reality is, sometimes E&O claims are unavoidable. After all, no one intentionally wants to make a mistake while advising their clients.
With that being said, there are ways you can avoid mistakes from occurring. Examples of ways to reduce mistakes include:
- Seeking another opinion from a licensed colleague. If you are a lawyer and have a question regarding your specific client’s situation, seek advice from a superior or colleague. They may be more educated in a specific area than you are.
- Stay current on all practices and laws. Laws are constantly evolving, as are best practices. The best way to keep laws, best practices, or the right products in your mind is to stay active. Continuously study your trade, even after passing any exam or license.
Advantages of E&O Insurance
The major advantage of E&O insurance is the fact that it reduces your personal liability. Advising people on some of life’s toughest choices, or biggest projects, is no easy task.
Mistakes do happen, and when they do, you want to make sure you are not held personally, or financially accountable to the mistakes.
Disadvantages of E&O Insurance
There really is no disadvantage to having E&O insurance. Sure, this insurance costs money, but it’s a fraction of the cost of a lawsuit.
Just remember, E&O insurance does not replace the other insurance products your business should carry, such as general liability insurance.
As a business owner, or professional who is in the business of advising clients, errors and omissions insurance is certainly something you should consider having. E&O insurance can save you quite a bit of money, and headache, in the event you were ever sued by one of your clients.
Although E&O insurance may not be the first thing people think of when they think about their personal finances, remember, personal financial planning is also about capital preservation and risk reduction. E&O insurance falls squarely in that sector.