Why Your Small Business Needs Errors and Omissions Insurance

What does Errors and Omissions Insurance Cover? 

Errors and Omissions insurance is known by several names: E&O insurance, professional liability insurance, professional indemnity insurance, and malpractice insurance. It is business insurance for professionals who make a living using their expertise—whether you're in real estate or designing a skyscraper. If you make a professional error, are inadvertently negligent, make an omission in important documents, etc. E&O insurance steps in to protect your business, giving you the ultimate peace of mind.

Errors & omissions insurance covers court costs, attorney fees, judgments, settlements, administrative costs, and other legal expenses brought against you and your business for any inaccurate advice or professional services your company may provide. In general, it is designed to protect the business from the financial harm of legal costs, damages awarded, and other related expenses as a result of:

• Alleged or actual professional negligence 
• Undelivered services or missed deadlines
• Inadequate work
• Violation of good faith and fair dealing
• Giving incorrect professional advice
• Copyright infringement
• Breach of nondisclosure 
• Claims of libel or slander
• Data breaches

The issuing insurance company usually considers these occurrences as covered claims.

Is E&O Insurance the Same as Professional Liability Insurance?

The short answer is yes. They are different names for the same type of insurance coverage. What it's referred to as (E&O insurance, errors and omissions, professional liability insurance, professional indemnity, or malpractice insurance) varies from industry to industry.

What is Excluded from Errors and Omissions Insurance?

E&O insurance does not cover occurrences that are covered under general liability insurance such as third-party bodily injury, property damage, or the cost of lawsuits related to those occurrences. Small business owners will need to obtain a separate policy for general liability. To learn more about the differences between general liability and professional liability, check out our handy guide: 'General Liability vs. Professional Liability Insurance. 

E&O insurance will also exclude coverage for:

• Intentional Fraud/Purposeful Wrongdoing: Deliberate acts of fraud or wrongdoing committed by the insured party with the intent to deceive or harm others.
• Illegal Acts: Any activities or actions that are in violation of local, state, or federal laws, as insurance cannot protect against illegal behavior.
• Punitive Awards: Damages awarded by a court as punishment for willful misconduct or gross negligence, which typically fall outside the scope of coverage.
• False Advertising: Claims related to deceptive advertising practices, including misleading statements or misrepresentations made by the insured.
• Stealing Patents or Trade Secrets: Claims arising from the theft or unauthorized use of intellectual property, such as patents, trade secrets, or proprietary information, as this constitutes a separate legal issue.

Who Needs Errors and Omissions Insurance?

Most professionals should carry E&O insurance. This includes but isn’t limited to:

• Doctors 
• Nurses
• Attorneys
• Accountants
• Architects
• Electricians
• Plumbers
• HVAC Installers
• Engineers
• Insurance agents
• Consultants
• Event planning services
• Advertising agencies
• Web Developers
• Real Estate Agents

If you provide a professional service, consider this coverage.

Who Does E&O Insurance Cover? 

Errors and Omissions Insurance typically covers:

• Business Owners
• Business Partners
• Salaried or Hourly Employees
• Contractors/Subcontractors

Is E&O Insurance Legally Required for Small Businesses?

Regulatory and licensing boards in some states require that you carry professional liability/errors and omissions insurance. Be sure to check with your licensing board to make sure you have the proper coverage in place before you begin operating your business.

While it may not be legally required, deeply consider the services you offer and whether or not they open you up to liability claims. Any errors made with the services you provide can result in costly court battles and financial loss, so decide wisely. The right insurance can be the perfect financial protection for your business.

Why Errors and Omissions Insurance is Necessary

Can your small business cover a major lawsuit without professional liability coverage? Most can’t fathom managing the defense costs that come with a lengthy legal battle. Anyone can bring a lawsuit at any time against anyone in America. There is no pretrial procedure where the plaintiff has to prove that there is sufficient evidence to continue with a suit. 

We share some examples to drive home the realities you may face and why you must obtain an errors and omissions policy: 

• Example #1: An event planner books a venue for a convention on the wrong day. Everyone shows up to find the venue has the convention booked the following day. E&O insurance will cover judgments, legal costs, and settlements up to the policy limit. 
• Example #2: An electrician is hired to rewire someone’s outdated kitchen. In the process, he incorrectly wires an outlet. It sparks and the homeowner’s kitchen starts on fire. They decide to sue the electrician for his negligent actions. But because the electrician has errors and omissions coverage, they cover the cost of the settlement and legal fees.
• Example #3: An Architect is hired to design and manage a project. However, his design is found faulty upon the building's first inspection. It sets the project back weeks to properly rebuild. The architect is sued for his negligent error by the owner of the project. His errors and omissions insurance coverage steps in to cover legal costs and associated penalties. 
• Example #4: An accountant is unable to keep up with his current client-load and fails to file a customer's tax return by the deadline. The client is slapped with a hefty fee. Because they believe the tax preparer was in error, they sue him to recover the cost of the fine. Errors and omissions insurance can cover the cost associated with the lawsuit.

Even if you were not negligent, proving so can still cost immense amounts of money as you deal with legal defense fees, court costs, and even potential settlement costs. 

Other Insurance Policies to Consider

Odds are your business will need coverage in addition to E&O Insurance. What you need varies depending on the type of business, but here are a few to consider:

Commercial Property Insurance

If your business has a physical location, consider commercial property insurance to protect the building and other physical assets (machinery, equipment, inventory, personal items, etc.).

Business Owners' Policy

A business owners' policy is an affordable way to bundle general liability insurance, property insurance, and business interruption insurance. Business interruption can help protect your business from financial losses due to a covered claim (i.e. your building is damaged in a fire) until you're able to operate again.

Cyber Liability Insurance

If you are a professional that deals with protected client information, consider adding cyber liability insurance to protect your business in case of a data breach that exposes client information.

Workers' Compensation Insurance

You're required to obtain workers' compensation insurance in almost every state if you hire employees. If employee injuries or illness occur, worker's compensation can cover a portion of their lost wages and medical expenses until they're able to return to work (so you don't have to).

How Much Does Errors and Omissions Insurance Cost?

An errors and omissions insurance policy varies in cost depending on several factors an insurance company takes into consideration:

• Industry of the Small Business: Different industries pose varying levels of risk for errors and omissions claims. High-risk industries may face higher premiums due to the increased likelihood of professional errors or disputes.
• Location of the Business: The geographical location of the business can impact insurance costs. Areas with higher legal and litigation activity may have higher premiums.
• The Services Provided: The nature of the services offered by the business is a key factor. Specialized or complex services may result in higher premiums, as they can involve greater professional liability.
• Claims History: A history of previous errors and omissions claims can significantly affect insurance costs. Businesses with a history of claims may face higher premiums, as insurers view them as higher risk.
• Coverage Limits: The level of coverage desired by the business affects costs. Higher coverage limits will generally lead to higher premiums, as the insurer is exposed to greater potential liability.
• Deductibles Chosen: The deductible is the amount the insured must pay out of pocket before the insurance coverage kicks in. Higher deductibles can lead to lower premiums but may require the business to bear more of the initial cost in the event of a claim.

The distinguishing factor between E&O insurance and other types of insurance is that it doesn't operate on a one-size-fits-all policy. Every business comes with its own unique risk factors. The insurance cost can be anywhere from $500 to $1,000 annually per person, with an average of around $700 (depending on the insurance company). The cost varies but one thing is certain—the cost of not having errors and omissions insurance in place can be overwhelming. Make sure you speak with a licensed agent to help you determine if you need this coverage.

Get a Free Errors and Omissions Insurance Quote

We can help connect your business with the right insurance company and the right policy for you. Complete the form above and one of our specialists will connect with you soon. Or you can give us a call directly at 877-907-5267.

Reviewed By: Sarah Reid, Licensed Agent