Errors and Omissions Insurance for Professional Service Providers

Best Practices | Insurance Coverage

By Jacob W. Gent

June 11, 2019

Whether or not you’re a business owner, you’ve probably heard of Errors and Omissions (E&O) Insurance.  But do you really know what E&O insurance is and why you need it?  This article is intended to provide an overview of E&O insurance in order to help you make sure your business interests are adequately protected.

What is E&O Insurance?

E&O insurance protects individual professionals and business that charge a fee to provide advice, expertise in problem solving, and other professional services. Errors and omissions insurance is liability insurance which covers businesses providing professional advice or services for claims arising from negligent acts or unintentional mistakes of owners and employees.

Any business that provides a service for a fee should consider purchasing E&O insurance.  The most common professions that need E&O insurance include doctors, attorneys, IT businesses, accountants, architects, professional consultants, and personal trainers.  Doctors, chiropractors and other medical professionals typically refer to this as malpractice insurance.  Attorneys, engineers, and architects refer to it as professional liability insurance.

What does E&O Insurance cover?

E&O insurance covers judgments, settlements, claims expenses, and defense costs up to the applicable policy limit for claims accusing the professional of mistakes, negligence, or providing bad advice which causes the client to experience a financial loss.   Even if the allegations are groundless, the cost to defend a lawsuit can be tens of thousands of dollars, which could bankrupt a business without E&O coverage.   E&O insurance policies may also cover misrepresentation where a product or service was not delivered as promised.  Violations of a client’s good faith such as any act of noncooperation, failing to communicate, or withholding information from a client may also give rise to an E&O claim.  Some E&O policies also provide coverage for copyright infringement involving written marketing materials, trademarks, logos, or software codes. Some also cover claims involving spoken defamation (slander) and written defamation (libel), such as posting negative comments or accusations about a competitor.

What doesn’t E&O Insurance cover?

As with other types of insurance, E&O insurance doesn’t cover claims related to intentional acts, fraud, and criminal acts.  Claims based on liability assumed under a contract, fee disputes, pollution, and discrimination due to race, sex, color, or creed are not covered.  Other non-covered claims include malicious or dishonest acts, bodily injury or property damage, and litigation started by another person insured under the same policy.  Wrongful acts that were reported under a previous policy, or that were known to the insurance policy holder prior to the effective date are also not covered.

Most E&O policies are written on a “claims-made” basis with a clearly defined retroactive date.  That means any claims arising from work performed prior to the start date of the policy are not covered.  However, some policies will provide coverage for negligent acts that occurred before the policy inception date, but filed at a later date.

There is no standard policy for E&O insurance and each policy must be closely examined to ensure it covers potential exposures unique to each business.  Most E&O policies contain dollar amount limits for individual claims and limits for multiple claims.  The individual limit is the most the policy will pay for each claim or wrongful act.  The aggregate limit is the most the policy will pay for all claims or wrongful acts during the policy period.  Some E&O policies include the costs of litigation, such as attorney fees and expenses, to defend a claim in the policy limit. This is called a “wasting” policy.  Other policies cover these legal costs separate and apart from the policy limit.  E&O policies often carry a retention clause, or deductible.  This is the amount the policy holder must pay out of pocket before the insurance company pays on a claim.

Failure to cover your practice with E&O insurance poses a serious financial risk, as the claims described above are not covered under a commercial general liability policy.  The cost of E&O insurance varies greatly depending on the type of business, location, prior claims history, and start date.  If you are a professional in the business of providing advice or services to clients, it is strongly recommended you speak with a qualified and knowledgeable insurance agent or broker to determine the coverage that best protects your practice and livelihood.