We've written in the past about how Errors & Omissions Insurance is particularly important for small technology firms, which often face a double challenge: first, legislation can't keep pace with evolving technologies and second, clients sometimes misunderstand the language and scope of a project. Both can make for a sticky situation if and when a client decides to sue.
Most owners of technology firms understand that they need E & O Insurance for the big contracts, but many are unsure about their E&O exposures and coverage needs for smaller projects.
Here's a look at why it's important to carry E&O Insurance for less significant projects as well as for the biggies.
E & O Insurance: Understanding Claims-Made Coverage
First, a quick review: Errors & Omissions Insurance protects your business in the event that one of your clients brings a lawsuit alleging that your professional work caused them a financial loss. If such a lawsuit comes up, your E&O coverage pays for the lawyer's fees and court costs needed to defend your company against the charges, as well as for any settlements or judgments you're found liable for paying.
The majority of E&O policies work on what's called a "claims-made" basis. This means that…
- Coverage must be in place at the time of the incident. In order to receive compensation from an E&O policy, the policy must be active when the incident that triggers the lawsuit occurs. In other words, if you purchase an E&O policy after a lawsuit-triggering incident, it won't cover you because it wasn't in place when the incident occurred.
- Coverage must be in place at the time of the claim. Your insurer will only cover an E&O claim if your policy is still active at the time the claim is made. Translation: a policy must be in force at the time of the incident AND at the time of the claim in order to grant benefits.
Why Does E&O Insurance Matter for Less Significant Projects?
The reason you need to have E&O Insurance for your less-major projects is twofold:
- In order to maintain E&O coverage for any of the work you do (including the bigger projects), you have to keep your policy in place continuously. Starting and stopping coverage prevents you from being able to receive benefits from a claims-made plan.
- Even smallish projects can lead to major claims. While your contract for a given client might be relatively minimal, the ripple impact your work has on a client's business could be significant. Robust E&O coverage ensures that you aren't taken off-guard by what seems like a disproportionately large suit.
With E&O coverage, the bottom line is that you need to be continuously protected, and you need to be protected for your biggest possible exposure. Anything less, and you risk having to pay any lawsuit-related expenses out of pocket.
Writtten by Brenna Lemieux - check her out at Google+ or Twitter