Errors and omissions (E&O) insurance is designed to cover someone who provides a professional service. Everyone from independent contractors to real estate brokers should have E&O coverage to protect against client claims of negligence or bad advice. Unhappy clients can cause a lot of disruption to your business, so it’s important to understand exactly why you need this kind of coverage.
We spoke with attorney Daniel Struck, a partner at Culhane Meadows in Chicago. Struck works with the firm’s insurance and litigation practice groups and offered responses to the most frequently asked questions when it comes to E&O insurance.
From the definition to the cost of E&O insurance, here’s everything you need to know to protect your business with E&O coverage.
What Does E&O Stand For?
“E&O” stands for “errors and omissions.”
But what's the difference between an Error and an Omission? An "error" is a mistake someone makes, while an omission is something they left out or excluded, possibly by mistake, but possibly not.
What Is E&O Insurance?
E&O insurance, also known as “professional liability insurance,” is a type of liability insurance that’s specifically designed for those who work in professional services industries, such as lawyers and real estate brokers, as well as professional services businesses. (The business can have many employees, like a consulting firm, or it can be a sole proprietorship with only one owner.)
E&O insurance provides policyholders with coverage for the costs of claims that an error, omission, breach of duty, mistake, or negligent act was committed in the course of providing professional services. These claims include written demands for damages, filings of lawsuits, and disciplinary proceedings. The costs and expenses of defending even a trivial claim can be substantial and often create a distraction from running a business or professional practice — as can the cost of settling a claim or being subject to an adverse judgment. E&O insurance is intended to protect insureds from these distractions and potential costs and liabilities.
Claims from dissatisfied clients are an all-too-common event, and E&O insurance can help to minimize the distractions and out-of-pocket expenditures that come with such claims.
What Does Errors & Omissions Insurance Cover?
E&O insurance covers a settlement amount or damages that the policyholder is obligated to pay to the claimant, as well as the cost and expense of defending against a claim. Even if a claim against an insured party is baseless, E&O insurance is valuable because it covers the substantial costs of defending against such claims, which include hiring an attorney and paying investigation and related expenses.
Keep in mind, however, that coverage is subject to the terms and conditions — and exclusions — of the relevant insurance policy.
Another important aspect of E&O insurance is that it is almost always written on a claims-made basis. That means that the insurance policy covers only those claims against you that are made within the policy effective dates, regardless of when the underlying act took place. To get continuous coverage, the policy would have to be renewed or replaced so there are no gaps between policy periods. A tail policy can also be purchased to extend the E&O coverage after a policy expires.
What Does E&O Insurance Not Cover?
There is no one line of insurance that covers every risk confronting a business. E&O insurance is no different: It covers some key professional liability risks, but it does not cover everything. For example, E&O insurance does not cover defense costs or liability for the following categories of claims:
- Bodily injury or property damage to third parties arising in the course of business. Claims concerning a customer who slipped in the office or an accident that damaged a neighbor’s property are among the kinds of risks typically covered by general liability insurance.
- Disputes with current, prospective, or former employees concerning alleged discriminatory employment practices or wrongful termination. Employment disputes are generally covered by employment practices liability insurance.
- Work-related injuries to employees. Workplace accidents that result in bodily injury to employees are typically covered by workers’ compensation insurance.
- The costs of responding to a data breach. Coverage for the costs of informing customers, providing credit counseling, and the like will be covered by a cyber-insurance policy. This coverage can also be added as an endorsem*nt (add-on) to an E&O policy.
The foregoing list is not exhaustive, but it illustrates the importance of identifying risk and purchasing insurance in an organized, comprehensive manner. Insurance policies are complex commercial contracts. The coordination of those contracts to create a safety net for a business cannot be completed successfully in a happenstance manner.
In addition to risks that are not covered by E&O insurance, we’ve already noted that coverage is dependent on the satisfaction of an E&O insurance policy’s terms and conditions. Coverage for an otherwise covered claim can be lost if an insurance policy’s terms and conditions are not satisfied or if an exclusion applies to a specific scenario. For example:
- As a claims-made insurance policy, E&O insurance does not typically cover claims that are made against you when the policy period is not active. An E&O insurance policy generally will not cover a claim that was made before or after your policy is effective, regardless of when the incident happened or when notice was provided.
- E&O insurance policies invariably contain exclusions barring coverage for intentionally fraudulent or illegal acts. The conditions under which the exclusion applies vary from policy to policy. But if the requirements for the application of that exclusion are satisfied, an otherwise covered claim will not be covered.
The small print in insurance policies makes a difference. Coverage can be lost if the notice requirements of an E&O policy are not satisfied or if an exclusion applies.
How Do I Pick an E&O Insurance Company?
There is no one-size-fits-all approach to selecting an E&O insurance company. Not all insurers write coverage that is suitable for every line of business, and some insurers specialize in E&O insurance that is tailored to the needs of particular industries. It is important to select an insurer who is familiar with the risks associated with your type of business.
In addition, price is certainly a consideration. But the criteria used for selecting an E&O insurer should never be limited solely to price. The terms of E&O insurance policies may vary from insurer to insurer and small differences in policy terms can have a significant impact on coverage. Further, factors such as the financial health and stability of an insurer, the capacity of an insurer to respond to the changing needs of your business, and the reputation of an insurer (for working cooperatively with an insured on a specific claim, or for responsive customer experience in general) are each significant considerations in selecting an insurance company.
How Much E&O Insurance Do I Need?
There is no “right” answer to this question. The appropriate limits of E&O insurance depend on, among other things, a business’ specific liability exposure and the litigation environment it operates in. An architect who designs single-family homes does not need the same E&O limits as a global architecture firm designing super-tall skyscrapers. Similarly, a physical therapist working in a state with a reputation for high personal injury verdicts might choose higher limits than a PT that works in a state with tort reform.
Determining the appropriate amount of E&O insurance requires an assessment of the professional firm’s potential liability exposure, expected claim frequency, and cost of insurance. Finding the “right” amount of E&O insurance requires careful consideration, and for many businesses, it will be invaluable to work with a trusted advisor who is able to provide meaningful counsel about evaluating risk, comparing insurance policies, and the difference between a perfect solution and a practical solution.
What Types of Businesses Require E&O Insurance?
The simple answer is that is valuable for any business that has clients and provides services requiring a particular level of skill or expertise. More specifically, some professions that require licensure or other certification—such as attorneys, doctors, or accountants—may be required to purchase professional liability insurance as a condition of practicing.
Who Needs E&O Insurance?
Even if E&O insurance is not required by law, E&O insurance is frequently a contractual requirement for firms or independent contractors doing business with clients under a professional services agreement. Even if E&O insurance is not required by contract or as a requirement of practicing as a professional, E&O insurance can be of significant financial value covering claims alleging a breach of a standard of care for businesses as diverse as software designers, technology consultants, management and business consultants, advertising agencies, graphic designers, real estate agents, property managers, and home inspectors.
In short, if a business or professional partnership provides services that require a particular standard of care or a level of skill or expertise to clients, it likely should have E&O insurance. If a business provides professional services to clients, it likely should have E&O insurance. If a business would find it onerous to bear the entire cost of defending a lawsuit alleging a breach of duty brought by a dissatisfied client, it should consider purchasing E&O insurance. E&O insurance has wide applicability and should be a part of the risk-management planning for a broad range of businesses.
How Do I Get E&O Insurance?
The insurance market and the manner in which commercial insurance can be purchased have changed considerably in recent years. Insurance that was once available only through commercial insurance brokers can now, in some instances, be bought online directly from an insurer. There is no single “right” way to purchase E&O insurance, and what works for one business might be a mistake for a different business.
Key considerations in selecting an appropriate insurance policy include the identification of the risks facing a business, finding the policy form that best responds to those risks, and determining the level of risk with which a prospective insured is comfortable. For some insureds, getting the right amount of advice and assistance means going to an experienced and trusted broker. For others, finding a reputable insurance company with responsive professional advisors online or by telephone works best for them. How to go about purchasing E&O insurance is a decision most appropriately left to the individual insured.
What Is the Difference Between D&O and E&O Insurance?
In simple terms, D&O (directors and officers) insurance and E&O insurance cover different categories of claims. However, the detailed analysis is more complex than that.
D&O insurance provides coverage for claims against the directors and officers, or the most senior leadership, of a company, primarily for their decisions as a senior leader. The claimants are usually shareholders or others with a financial stake in the company, and typical claims might involve negligence in ensuring compliance with environmental or other laws, or (more recently) failure to adequately protect the company against cyberattacks. There is rarely overlap in the sense that the claimants in a D&O suit must have standing to sue the director or officer for their mistakes in running the company. A customer of a company does not have that kind of a stake in the company, even if they have been injured as a result of those mistakes. That same customer might still bring a lawsuit, but the claim would be covered under a general liability or E&O policy, not a D&O policy. Some D&O policies often add coverage that applies to other claims related to the management of a company, such as discriminatory hiring decisions. There’s even less likelihood of overlap between D&O and E&O policies because D&O policies usually carve out claims concerning the rendering of professional services. The terms and scope of these exclusions vary from insurer to insurer, but in general professional firms should assess whether they are likely to face a D&O claim based on how large the organization is and whether there are financial stakeholders potentially able to sue the company for poor management decisions.
Does General Liability Cover E&O?
General liability insurance provides coverage for claims brought by third parties against an insured for physical injury, property damage, or personal and advertising injury (e.g., false imprisonment, libel, and slander). General liability insurance policies also contain exclusions for purely financial injury and for claims concerning the rendering of professional services, so general liability policies do not cover the same exposures as E&O.
On the other hand, E&O insurance provides coverage for claims alleging that an insured made an error or mistake while providing professional services that resulted in economic loss to the claimant. E&O policies do not cover bodily injury, property damage, or personal and advertising injuries.
Thus, general liability and E&O insurance complement each other, providing coverage for liabilities that are not covered by the other type of insurance.
Does an LLC Need E&O Insurance?
If an LLC provides professional services or services that require a specialized level of skill or expertise, it likely needs E&O insurance. The financial consequences of being an LLC that provides professional services but does not have suitable E&O insurance can be catastrophic for the ability of the LLC to continue as a going concern.
How Much Does Errors and Omissions Insurance Cost?
It’s difficult to calculate an “average” cost for errors and omissions insurance. As a whole, professional liability insurance provides coverage for so many different kinds of insureds with such widely divergent risk profiles and claims histories that it is impossible to accurately characterize the “average” insured. The risk profile of different categories of insureds varies widely—ranging from the risk profile of a global engineering firm to the risk profile of a local dentist. The claims history of different categories of insureds is similarly wide-ranging—from hospitals that are sued on a daily basis to small engineering firms that have never been sued.
Instead of trying to identify an “average” cost for professional liability insurance, it is more instructive to identify some of the factors that are taken into consideration in determining the cost of E&O insurance. These factors include:
- Exposure to Risk: Businesses with greater liability exposure will have higher premiums than similarly sized businesses in low-risk industries. Similarly, E&O insurance costs will be higher for businesses that are sued frequently than for businesses that are not routinely the target of lawsuits.
- Claims History: Underwriters look beyond industry-wide risk factors to consider the claims history of particular insureds. Insurance costs will be substantially higher for a prospective insured that has been sued multiple times, with adverse judgments and a history of policy cancellations than for a prospective insured with a clean claims history.
- Business Practices: Underwriters also look at the practices of a prospective insured. A prospective insured with rigorous internal risk controls will be viewed more favorably by underwriters than a prospective insured with loose controls.
- Scope of Coverage: It should not be a surprise that insurance companies will charge more for an insurance policy with a low deductible, high limits, and the broadest possible terms than for an insurance policy with a high deductible, lower limits, and standard coverage terms.
The cost of E&O insurance for a particular insured will incorporate each of the foregoing factors.
Can You Run a Business Without Insurance?
As mentioned earlier, for some professional businesses, E&O insurance is legally required. But for those that are not required to buy E&O coverage, it’s important to point out that running a business without insurance would leave the business owners and employees at significant risk of financial ruin, even if technically “possible” to do so. The cost of defending claims is easily in the five digits, even if the business is not found liable for any damages. There is also the cost of valuable time and mindshare of the parties involved in the lawsuit to respond to court pleadings, depositions, negotiations, or even trials. These costs can dramatically impact business operations, and for many business owners, it’s not worth the risk of having to deal with lawsuits with no safety net.
Do I Need Both Professional & General Liability Insurance?
General liability and professional liability insurance cover different categories of risk. Most businesses need general liability insurance if they do any advertising or visit clients (or have clients visit them). As long as business is conducted in a physical place by human beings who are working on behalf of other human beings or selling some product, general liability insurance is critical to a business. Not all businesses, however, need professional liability insurance, because not all businesses provide services that require some level of skill or expertise.
How Do I Avoid E&O Claims?
The best way to avoid E&O claims is to faithfully and consistently utilize the best practices appropriate to a particular profession or business. No amount of insurance can entirely avoid E&O claims. Insurance helps to reduce the cost and impact of E&O claims.
Best practices to avoid E&O claims include:
- Keeping up with developments and current teaching in your profession by participating in professional associations and taking continuing education courses.
- Maintaining an active practice within your area of expertise.
- Maintaining a manageable workload.
- Hiring capable and trustworthy employees.
- Providing proper supervision to employees and contractors.
- Practicing strict quality control.
E&O insurance can save you from a lot of financial trouble. Not only will it save money out-of-pocket, but just knowing it’s there will give you the peace of mind to provide your clients a superior experience.
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