What Is Errors and Omissions Insurance? A Simple Guide for Business Owners

Errors and omissions insurance (E&O insurance) is sometimes called professional liability insurance. When small businesses, particularly service providers, are at risk of getting sued for not professionally doing their job, this type of policy would kick in. Service providers should understand this policy and how it differs from general liability insurance. 

Introduction to Errors and Omissions Insurance

An errors and omissions policy covers small business owners for professional mistakes and omissions. This is widely known as malpractice insurance in the medical industry and could be a mistake such as a doctor not performing surgery on the correct body part. Service providers are at particular risk of getting a claim against them for unprofessional service that resulted in a financial loss to the client. 

Who Needs Errors and Omissions Insurance?

Service providers are the small business owners who most need professional liability insurance. While it is not limited to thisl list, these are the most common industries:

• Legal and financial advisors
• Healthcare professionals
• Real estate and property management
• IT and technology consultants
• Architects and engineers
• Tutors
• Fitness professionals

It doesn’t matter if you are a one-man show or a larger organization with 1,000 employees. Getting the right policy is imperative to protecting the business’s financial health. 

How Does Errors and Omissions Insurance Work?

Let’s take a closer look at how E&O insurance works. 

Coverage Details

The coverage details are the policy limits for the plan. These are the caps that the policy will pay out. Errors and omissions insurance policies start with $100,000 in coverage limits and go into the millions. You can get the coverage you need to protect yourself. 

Exclusions and Limitations

An E&O insurance policy does have its limits. Small business owners should not expect coverage for general liability claims as that is covered by general liability insurance. These are claims of injury or property damage to third parties resulting from business operations. Business owners should also not expect workers’ compensation claims to be covered under the policy. There are many policies to cover the financial loss of other types of claims, and should be investigated by the small business owner to cover gaps in coverage.

Policy Duration and Renewals

An errors and omissions insurance policy is good for a one-year term. At that point, it is renewable with an updated premium. Premiums may go up or down based on underwriting data such as claims history or changes in small business revenues. 

Key Features of Errors and Omissions Insurance

The key features of E&O insurance are liability coverage, defense costs, and settlement costs. 

Liability Coverage

Liability coverage is the primary feature of the E&O insurance policy. It is there should the service provider be sued for non-professional services leading to financial losses of the client. If they are found liable, the policy will pay the claim on behalf of the insured. 

Defense Costs

A key feature of the E&O insurance policy is defense costs. The insurance company provides a legal defense on its dime to help protect the business owner from loss and reputation harm for having a claim. While the insurance company doesn’t allow the small business to choose their own legal team, one is provided for no additional cost as part of the claims process.

Settlement Provisions

The E&O insurance policy pays settlement costs for claims or any judgment costs if it goes to court and a judgment is issued. This protects the small business from having to pay costs out of pocket, which can be tens of thousands of dollars or more in damages. 

What Does E&O Insurance Not Cover?

An E&O insurance policy does not cover every type of claim. The following are not covered by the policy:

• Intentional wrongdoing or fraud
• General liability claims
• Employment disputes
• Workers’ compensation
• Property damage or theft
• Data breaches

Benefits of Errors and Omissions Insurance

Let’s take a closer look at the benefits of an E&O insurance policy. 

Financial Protection

A professional liability insurance policy provides financial protection for small business owners. It does this by absorbing the cost of any claims and paying up to the policy limits for settlements and judgments. It also pays legal costs so the business is defended. When a business has an errors and omissions policy, it doesn’t have to pay costs out of pocket.  

Reputation Management

The legal defense benefit of the policy makes it a great tool to protect a small business’s reputation when claims arise. Not every claim will be valid, but claims can have a lasting negative effect on a company’s image. The legal defense does a good job of fighting false claims and protecting the reputation of the company. 

Peace of Mind

When a business owner can budget for a policy that will cover up to millions of dollars in financial losses and damages, this can give them peace of mind. The insurance company takes on the risk so that the business owner can focus on delivering quality service. 

Cost Factors of E&O Insurance

Several cost factors affect the premium of E&O insurance. These cost factors include:

• Industry and risk levels: Some industries are at a higher risk of claims than others. This will cause the premium to go up.
• Geographic location: Some cities are more litigious than others and see more claims. This will affect premiums accordingly. 
• Experience and claims history: The more years you’ve been in business doing a professional job without claims will help to keep premiums down.  

How to Choose Errors and Omissions Insurance

When buying an errors and omissions insurance policy, you want to make sure to: 

• Assess business needs: What is your risk of a claim and how big could a possible claim be in your industry. Get coverage to protect against this. 
• Compare insurance providers: Shop policies around to ensure you get a quality policy from a reputable insurance carrier. 
• Understand policy terms: Make sure you know what is and isn’t covered by your policy so you can get other policies to cover the gaps in insurance. 

Safeguard Your Business from Costly Claims with Errors and Omissions Insurance

An errors and omissions insurance policy is an important policy for service providers to get. Without it, they are on the hook for professional mistakes that can lead to thousands of dollars in financial losses to the company. Connect to a reputable carrier that can help you get the coverage that you need.