Does My Small Business Need E&O Insurance?

As a business owner, you are exposed to some level of risk. While the specific risks will vary depending on what your business does and how large it is, most businesses expose themselves to the possibility they may be sued if their product or service causes problems for their clients. Errors and omissions insurance (E&O) is a type of insurance coverage that can be very important for businesses that offer professional services or professional advice. We'll help you understand what types of situations are covered by E&O insurance and whether you should look into it for your small business. What is errors and omissions insurance? Errors and omissions coverage is a type of coverage that protects an insured business against the costs of claims made by clients for errors in work or in the advice the business provides to clients. Clients can suffer financial losses and interruptions to their business due to negligence on your part. As a result, they may sue your sole proprietorship or corporation for monetary damages. If you provide advice to clients as part of your business, such as lawyers or accountants do, a client may calculate the cost of errors associated with bad professional advice they received from you. Since even the most careful and diligent people can occasionally make errors in their work, this type of insurance provides peace of mind that you won't lose your business or even your personal savings because of an unforeseen mistake. What does errors and omissions insurance cover? To the extent outlined in your insurance contract, E&O insurance will protect you by covering the cost of a claim made against your business along with other associated costs such as legal costs and settlement fees. Scenarios that may require errors and omissions coverage include: A negligent act, error, or omission Inaccurate advice Misrepresentation Loss of documents Failure to deliver due to a third party Breach of confidentiality Delays Failure to provide a service Accidental trademark infringement Your insurance company should specify exactly what is covered by their error and omissions policies, but this non-exhaustive list should give you a sense of how E&O insurance can be important for protecting your business. What does E&O insurance not cover? As important as E&O insurance is, there are still many liabilities that it doesn’t cover. For these, you'll likely require different business liability insurance policies in addition to E&O insurance. Some important exclusions include: 1. Employment practices If you or your business is sued for wrongful termination, harassment, or employment discrimination, your E&O insurance will not cover this. Employment practices liability insurance would be required in these situations. 2. Intentional acts E&O insurance is meant to cover accidental errors or omissions, not to protect businesses that intentionally cause harm or loss of earnings for their clients. If you engage in illegal activity or intentionally provide incorrect advice to a client, any claims and associated costs will not be covered. 3. Client information Your clients' personally identifiable information getting hacked or stolen wouldn't be covered. For this, you'd likely require cyber liability insurance that offers coverage in the event of cyber-related security risks. 4. General liabilities associated with your business An example of a general liability would include a customer coming into your shop and getting a bodily injury after tripping, then suing you. In this instance, you would require corporate general liability insurance, also known as a CGL policy. What is the difference between errors and omissions insurance coverage vs professional liability insurance? The terms “professional liability insurance” and “errors and omissions insurance” are used interchangeably. But, they refer to the same kinds of liability insurance policies. Therefore, there is no difference between E&O insurance coverage and professional liability insurance. How does having E&O coverage protect my business? Regardless of how careful you and your employees are, mistakes are a part of life. As a business professional, it's important to protect yourself from inherent business risks that can be costly and stressful, and may even cause you to shut down your business for good if the surprise expense doesn't fit into your business budget. While you can always implement better systems to reduce the number of errors in your business, E&O coverage can give you peace of mind that you won't have to pay vast sums or lose your business because of a lawsuit. Who needs errors and omissions insurance (E&O)? If your business provides a service or advice, you should consider getting E&O insurance. Some examples of businesses that should look into this kind of insurance policy include: Accountants and accounting firms Wedding planners Photographers Event planners Medical professionals Advertising agencies and advertising consultants Technology consultants Management consultants Travel agents Any business where you provide a service or advice to customers would likely be a good candidate for this type of business insurance. Why is errors and omissions insurance (E&O) important? Costly lawsuits can ruin a business, and E&O insurance is a great way to protect your business against claims of negligence. If you provide a service or advice to customers, it is simply not worth the risk of skipping on taking out this type of insurance. While an E&O insurance policy is an ongoing cost, the cost of getting sued and dealing with legal defense costs would likely be far greater. Is errors and omissions insurance (E&O) expensive? While some E&O insurance policies can start from $250 per year, most businesses will likely pay more. Your cost will depend on your insurance broker and on the specifics of your business situation, since some businesses are higher risk than others. The price will also increase as your coverage limit increases. The best way to find out what the price will be for you is to contact a few insurance providers to compare quotes and coverage plans. Doing this when you set up your business will ensure you fit the cost of insurance into your business financial planning.