Business Risks Covered by Errors and Omissions (E&O) insurance

3 min read

When you think of business liability, your first thought may be the risk of property damage at a client job site. However, your business must manage other risks, including the potential legal liability if you’re accused of making a mistake. This discussion explains errors and omissions (E&O) insurance, which is also known as professional liability insurance. You’ll learn why your company needs this type of coverage, what the insurance policy covers (and doesn’t cover), and the cost of insurance.

What is errors and omissions (E&O) insurance?

An E&O policy protects your business assets if a customer sues you for making a mistake or omission as you perform a service, or give professional advice. The policy can cover the cost of legal fees and other defense costs related to a lawsuit. An E&O policy can also help cover the risk of financial loss due to a legal settlement or court judgment.

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Why your company needs errors and omissions insurance

Defending your business from a legal claim can be expensive, even if the claim isn’t legitimate. You must spend money on attorney’s fees and other legal costs to address the lawsuit and resolve the matter.

If you divert cash to pay for a legal issue, you have less money to operate your business. Retailers, for example, need funds to purchase inventory, and every business must meet payroll. Paying legal costs may limit your ability to do business, and you may lose revenue.

The outcome of legal action cannot be determined in advance. If you put an E&O policy in place, the policy can help to cover the cost of a settlement or court judgment. While you can’t predict the outcome of a legal action, you can put insurance in place to protect your business.

Some professionals have a higher level of exposure to negligence lawsuits related to errors and omissions. Professionals who provide advice, including doctors, attorneys, engineers, may face negligence claims for larger dollar amounts than other industries.

Many states require certain professionals to carry some form of errors and omissions coverage. Malpractice insurance is the type of insurance required in the medical and legal professions, for example.

What does errors and omissions insurance cover?

Here are the types of costs your E&O policy may cover:

  • Attorney fees
  • Court costs, including the cost of a court reporter
  • Expert witnesses
  • Court judgments
  • Legal settlements

Preparing for a court case may also be expensive. The policy can cover administrative costs incurred to gather and organize documents. A lawsuit may require you to gather medical records, accounting data, business contracts, or personnel records.

What is not covered by E&O insurance?

If you commit an illegal act, or if you intentionally deceive the customer, an E&O policy will not cover your legal costs. Here are two examples that will not be covered by E&O insurance:

  • A builder violates the terms of a customer contract may intentionally using poor quality materials, and does not disclose the use of the materials to the client.
  • A business owner knowingly uses a patent without receiving permission from the patent owner.

Other legal situations require a different form of insurance coverage. If a client is injured at your office, for example, you need a general liability policy to address the risk of a lawsuit. Workers’ compensation insurance covers the cost of an employee’s work-related injury.

Who needs errors and omission insurance coverage?

Service providers need E&O coverage. In addition to the professions mentioned above, tradespeople (carpenters, plumbers, electricians) should carry E&O insurance.

Accountants, financial institutions, architects, and marketing firms also carry E&O policies. If you give advice or provide a service to customers, you need this form of insurance coverage.

How much is errors and omissions insurance?

The cost of Errors and Omission(E&O)/Professional Liability insurance depends on a number of factors:

  • Size of your firm: The more workers you employ, the greater the risk of a mistake or error. Larger firms pay higher premiums.
  • Industry: A doctor accused of making a mistake may be sued for a much higher dollar amount than a plumber. The dollar amount of liability is closely tied to the degree of care expected in the profession. An attorney who misses a court deadline, or a bookkeeper who doesn’t reconcile the bank statement for months are both acting without due professional care. Both parties may be subject to professional liability claims.
  • Claims history: Firms that are consistently thorough with their quality checks and avoid E&O lawsuits will pay lower premiums.
  • Coverage limits: Your business will pay higher premiums for high levels of coverage. A plumber who performs residential repairs has a lower level of risk than an engineer working on a commercial building project. The engineer will need a policy with a higher dollar amount of coverage.

E&O policies can cover the owner, all employees, and the work performed by subcontractors.

According to Insureon, the median annual cost of errors and omissions insurance for small business owners is about $710. Bizinsure analyzed data from more than 5,000 small business customers and found that the average annual cost is $767.

What happens if I don’t get coverage?

If you’re sued and do not carry errors and omissions insurance, the cost of your legal defense may require all of the firm’s available cash. If you settle the case, you’ll pay more out of pocket, and a court judgment maybe even more expensive.

If you sell company assets and raise funds for your legal defense costs, your ability to operate the business may be limited. Depending on your company structure, a lawsuit can also put your business and personal assets at risk.

What to do next

Talk with an insurance advisor/ consultant at QuickBooks Insurance to determine the types of insurance coverage you need for your business, and schedule a review of your policies each year. QuickBooks Insurance has partnered with multiple Brokers & Carriers to make sure your business has just the right coverage at the right price. Contact QuickBooks Insurance to obtain free quotes for business insurance coverage. QuickBooks customers have access to a quoting platform where they can generate insurance quotes.

Get proper coverage in place, so that you can grow your business with confidence & peace of mind.

Insurance tailored for your business, at a price you can afford.