Errors and Omissions (E&O) Insurance: What It Covers

E&O insurance is a sort of professional liability insurance that protects businesses, their employees, and other professionals from allegations of poor work or negligent acts.

Understanding Errors and Omissions (E&O) Insurance

Errors and omissions coverage is a type of liability coverage. It shields businesses from the whole expense of a client's claim against a professional who provides advice or services, such as a consultant, financial advisor, insurance agent, or lawyer. It is a type of business insurance that covers a corporation if someone accuses it of making a mistake.

If a company provides services to a consumer for a price, it is common for them to purchase E&O insurance. Many large commercial insurers provide this type of insurance. Companies that operate from a home office must get separate coverage; errors and omissions insurance cannot be obtained under a homeowner's policy.

What E&O Insurance Covers

The benefits that E&O insurance provides to businesses or individuals vary widely based on the policy and insurance provider issuing it. E&O insurance, in general, covers:

• Errors, mistakes, or oversights incurred during the course of work.
• Failure to meet a deadline or provide a promised service to a customer.
• Professional negligence.
• Failure to fulfill a certain standard of care, particularly one established by a specific profession.
• Breach of contract.

In terms of specific charges, E&O may cover legal and judicial fees if a corporation is sued. Attorney and other legal fees are frequently compensated regardless of whether the firm is found to be guilty of the offense at hand. E&O may cover specific sorts of judgment settlements in which the corporation is determined to be at fault. It also pays the costs of damages and expenses caused by others as a result of misconduct.

What E&O Insurance Does Not Cover

These plans do not cover criminal prosecution or some civil court responsibilities that are not stated in the policy. Illegal acts, purposeful acts of wrongdoing, or criminal activity are all included. E&O insurance frequently does not cover bodily injury caused by your company, which is normally covered by general liability insurance.

E&O insurance may or may not cover temporary employees, claims arising from work completed prior to the policy's inception, or claims in different jurisdictions. It may also exclude lawsuits for information leaks caused by cybercrime, employee injuries, or discrimination. These latter three scenarios are all covered by various types of insurance.

Who Needs E&O Insurance 

Court expenses and settlements up to the amount indicated in the insurance contract are frequently covered by errors and omissions insurance. This type of liability insurance is typically necessary for businesses that provide professional advice or services. Without E&O insurance, a firm can be held accountable for up to millions of dollars in damages, plus the costs of a legal team.

E&O insurance is available to insurance brokers, insurance dealers, realtors, licensed investment advisors, financial planners, and other financial professionals. E&O insurance is frequently required by regulatory organizations such as insurance regulators, the Financial Industry Regulatory Authority (FINRA), or even a company's investors.

Nonprofits, general maintenance companies and contractors, and engineering firms are examples of enterprises that can benefit from E&O insurance. E&O insurance is also required for any other corporation or professional who performs a service, such as wedding planners and printers. Doctors, dentists, and other medical professionals also purchase E&O insurance, which is known as malpractice insurance.

For example, a client may sue an advisor or broker after a bad investment, even though the risks were well-known and within the client's parameters. Even if a court or arbitration panel rules in favor of a broker or investment advisor, legal fees can be prohibitively expensive, which is why E&O insurance is essential.

E&O Insurance Cost

The cost of a policy is determined by a variety of criteria, including the type of business covered, its location, and any previous claims that have been paid out. A person or company with a history of litigation has a higher underwriting risk, and as a result, E&O insurance may be more expensive or less favorable in terms. E&O insurance might cost between $500 and $1,000 per employee each year on average.

Example of E&O Insurance

Assume a corporation that runs data servers utilized by third parties is compromised by hackers who get access to proprietary information and customer data. The corporations hacked then sue the server-hosting company for damages due to weak protection.

The server-hosting firm has an E&O insurance coverage that they analyze to determine what it covers and what it does not cover. To the company's advantage, its errors and omissions policy is comprehensive and covers such scenarios. The insurance company covers the legal fees associated with the court case against various corporations. It also covers any monetary damages awarded by the courts or agreed upon in arbitration.

Having errors and omissions coverage can assist a firm escape a significant financial impact, or even bankruptcy, depending on the company's financial situation. If you or your employees provide professional advice or other professional services, E&O insurance may be something to think about.

The Bottom Line

E&O insurance is a type of coverage that protects a corporation from mistakes made during the course of business. When a firm genuinely fails to meet a deadline, makes a major omission, makes a professional oversight, or engages in professional negligence, the harmed party may sue the company. In these cases, the corporation may have insurance coverage to cover legal and damage costs.