Errors and Omissions Insurance: Protection from Your Mistakes
Doctors have "malpractice" insurance – shouldn't there be a similar policy for IT businesses and other professions? There is. Errors and Omissions Insurance pays for lawsuits over professional liabilities (i.e., mistakes or oversights you make as part of your work).
For independent IT contractors, consultants, and sole proprietors, professional mistakes might include….
- Delivery of malfunctioning software or hardware.
- Failure to perform a job.
- Failure to deliver the goods and services agreed to.
- Professional negligence.
- Incorrect advice.
In other words: E & O Insurance covers costs associated with mistakes, omissions, recommendations, and advice that cost your clients money.
Your professional liabilities are different from your general liabilities in one major way: general liabilities are things that go wrong that could happen in any industry. Professional liabilities are things that are unique to the work you do.
Here are two examples.
Let's say your IT consulting firm recommends that your client, a marketing firm, purchase the full suite of Adobe design products, which costs thousands of dollars. After a month of using them, the marketing firm realizes it only needs one of the
more stripped-down applications and is frustrated that it purchased the whole package. The firm could sue your business for the recommendation, saying you incorrectly assessed its needs and wasted its money.
Or imagine you set up Microsoft Office for a publishing company. This is as standard as it gets – nearly everyone uses MS Office. However, this publishing company runs an academic press that relies on anonymous peer review. MS Word automatically
lists a document's owner and anyone who edits it under the document properties. For months, the printing press thinks it is sending anonymous feedback back to its authors, only to find that your recommendation actually compromises its review
process and damages its reputation in the academic community. Your business could be sued even for recommending something as simple as MS Office. A judge may rule that you should have done more to understand the intricacies of the software and the
One more key consideration about E&O Insurance: Your clients may allege you've made professional mistakes even when you haven't – which is one reason it's vital to have Errors and Omissions coverage. An IT contractor can do everything
correctly, dotting all the i's and crossing the t's – but still be sued by a dissatisfied customer. And even if a lawsuit against you is frivolous, your E&O coverage will kick in to cover the costs.
Also of note: many E&O policies include some Cyber Liability protection. To determine whether your E&O policy has this crucial coverage, ask your insurance agent.
Important Notes about Errors and Omissions Insurance: Understanding Claims-Made Coverage
Here's something every IT contractor should know about E&O coverage: the timing of a lawsuit can affect whether or not your Errors and Omissions Insurance covers it.
Let's imagine you receive a court summons. You answer your office door and are a little startled when the person standing in front of you asks your name. After you respond, they serve you with a court summons and walk away. At your desk, you spread
out the documents. You vaguely recall the work you did for the company that's suing you. You scan through old emails and the details start coming back. It becomes clear that the company is suing you for a malfunction in the software you installed
five years ago, which it's apparently still running. The big question is, does your E&O Insurance cover something that happened that long ago?
Lawsuits can materialize years after the event that triggered them. Typically, E&O only covers events that happened after you started your policy and for claims that are filed while the policy in force (this is called "claims-made"
coverage). If you are sued today for something that happened years ago, your current coverage would only pay for the lawsuit if you started your policy before you delivered the work in question and you still have an active policy. In other words,
your policy needs to have been active when you made the alleged mistake and still active, years later, when the lawsuit occurs.
What happens if you switch insurance carriers? Your new policy may not cover something that happened under your old one. But you can take steps to make sure you're covered by mistakes you made in the past:
- Stay with one provider during your business's lifespan. Because you can adjust your policy to meet your business's changing needs, you can buy E&O coverage from one insurer and update it as you grow. If you keep a policy
throughout the duration of your business's life, you won't have any gaps in coverage.
- Buy Prior Acts Coverage. If you switch policies, make sure your new policy has Prior Acts Coverage, which pays for lawsuits from events before you purchased that policy. If you're purchasing your first E&O Insurance policy
but have been conducting business for a while, you can also purchase Prior Acts coverage to cover work you already completed.
- Make sure to disclose required information. If you buy a new policy (or switch policies), make sure you disclose all the required information. If you fail to tell your new insurer about an old client who might sue you, the insurance
company may refuse to cover the lawsuit when it occurs.
Next: Fidelity Bond Insurance: Why Your Clients May Require This Coverage