Errors and omissions insurance (E&O) protects a business against claims that it did not provide services that were expected or promised. Specifically:
- You caused a client financial loss due to a mistake (errors).
- You didn't perform a service (omissions).
It is sometimes referred to as professional liability insurance. Errors and omissions insurance typically pays the costs of a legal defense, out-of-court settlements and judgments, even if the lawsuit was groundless. Generally, errors and omissions insurance is not included in a business owners policy (BOP) but can be purchased separately or as an endorsement to a BOP.
What does errors and omissions insurance cover?
Claims that are typically covered by an E&O insurance policy include:
- Misrepresentation—covers you against claims that your business misstated a fact and that your client relied upon that fact. For example, if you sell an electronic device that you said was "as good as new" but didn't realize the device was discontinued and no longer getting software updates, it could be considered misrepresentation.
- Negligence—covers against claims of errors and omissions for the service your business provided. This could include giving inaccurate advice or failing to provide a service. For example, a tax accountant who gives bad advice about a tax return.
- Violation of good faith and fair dealing–generally, a contract requires your business to act in an honest and fair way so that a client receives the contract's benefits. If a business acts (or fails to act) in a way that doesn't benefit the client, whether intentional or not, it may be a violation of good faith and fair dealing. For example, if you are a contractor and you neglect to get a required inspection done prior to beginning construction, it could be considered a violation of good faith.
What's not covered by errors and omissions insurance?
E&O insurance typically doesn't cover claims that might fall under other insurance policies, such as a general liability business insurance or workers comp insurance policy. Insurance claims that typically are not covered by E&O include:
- Advertising injuries such as slander, libel and copyright infringement.
- Bankruptcy.
- Employee injuries, which are generally covered under a workers compensation policy.
- Employment disputes, such as claims of discrimination, harassment or breach of contract, which are typically covered under an employment practices liability insurance (EPLI) policy.
- A business's liability for property damage or injuries are usually covered under a general liability policy.
- Intentional and criminal acts are usually never covered by insurance.
Errors & omissions insurance cost
The cost of an E&O policy depends on several factors, including:
- The type of business or profession.
- The location of the business.
- The number of employees.
- How many years you've been in business.
- If you have a history of E&O claims.
Do you need errors & omissions insurance?
If your business works directly with customers and provides a service, you may want to get E&O insurance. Depending on your profession, your state may require you to have E&O insurance.