When you purchase an IT Errors and Omissions policy, you should make sure you know…
- How this coverage works.
- What your responsibilities are.
- What its limits are.
- What your insurer will cover.
While that may sound like a lot of homework – especially for a small-business owner – we'll make it simple. Let's look at five basic features of your E&O Insurance and what they mean for your business.
5 Features of E&O Insurance IT Consultants Need to Know
IT Errors and Omissions Insurance may cover the cost of lawsuits when clients sue over problems with your work, data breaches, and professional shortcomings. E&O policies can be crucial because they offer some protection in the event a disgruntled client decides to sue you.
To make sure your coverage provides the appropriate support, let's review how E&O works. These five terms can help you sort out what your policy does and doesn't cover:
- Occurrence limit vs. aggregate limit. Your E&O's aggregate limit is the total amount your insurer will pay over a year. The occurrence limit is the amount it pays per claim. For instance, if your occurrence limit is $1 million and you're sued for $2 million, your policy would only cover $1 million in legal bills. Now, let's say your aggregate limit is $2 million and your occurrence limit is $1 million. Your insurance would cover two lawsuits costing $1 million each, but would only cover half of one costing $2 million.
- Third-party cyber liability coverage. If your IT fails and allows a data breach to occur, a client could sue you – even if you're not at fault. Because of this risk, E&O Insurance can include third-party cyber liability coverage, which may help cover your data breach lawsuit costs. See "Yes, Your Client's Data Breach Could Get You Sued" for more examples.
- Right and duty to defend. Your insurance policy should say that the insurer has the "right to defend" or "right and duty to defend" your business. This means that when you're sued, the insurer can pay for your legal defense. It also means that the insurer may be obliged to defend you even if the lawsuit is totally unfair or frivolous.
- Claims-made coverage. E&O is a "claims-made" coverage, which means that it only covers lawsuits over work you performed while your policy was in place. If you're sued over mistakes you made before you had E&O, your policy generally won't cover it unless you pay for "prior acts" coverage. Because of this, it may be important to have E&O in place from the earliest days of your business. See the article "Thinking of Canceling your Business Insurance? Check These 6 Things First" for more on why it's important to start and keep an E&O policy active.
- Your responsibilities in the event of claim. When you're sued, make sure you know what your insurance policy requires of you. Call your insurance agent right away to make sure you're following protocol and ask for guidance.
If you have any questions about how E&O Insurance works or what you should look for in a policy, don't hesitate to talk with one of our IT insurance agents.