One of the most important insurance coverages for any small business – and especially for independent IT project managers – is errors and omissions (E&O) coverage. Many small technology companies are not sure what it covers and how it differs from other types of insurance policies.
Here are answers to some of the most common questions that account representatives at TechInsurance hear from IT professionals about E&O insurance:
What’s the difference between professional liability and errors and omissions insurance?
“Professional liability insurance” and “errors and omissions insurance” are essentially different terms for the same type of insurance, which protects your business in the event that a client alleges that you or one of your employees made a mistake while providing IT services, causing that client to suffer a financial loss.
What’s the difference between E&O insurance and general liability insurance?
While E&O coverage (also known as professional liability insurance) covers you for errors you may make while doing your job, general liability insurance responds to claims of bodily injury or property damage. For example, you or one of your employees injures someone or damages property at the client's location, or someone comes into your office and slips and falls. General liability is often required by contracts because clients will often want to make sure that any business providing services on their premises carries general liability insurance, whether it is a plumbing contractor or an IT contractor.
A Business Owner’s Policy, also known as a BOP, includes both general liability insurance and property insurance. The property insurance portion of a BOP protects your business property (at your location or at a client site) against physical loss or damage by theft or fire, for example. A BOP is an excellent choice for many solo practitioners and small businesses.
Client contracts may require that IT project managers carry both professional and general liability coverage. While you can purchase general liability and property policies separately, buying them together in a BOP is generally more cost-effective and is an easy way to get more-complete coverage for the needs of most small IT businesses.
But doesn’t general liability insurance already include errors and omissions coverage?
No. General liability doesn’t protect your company in the event that a client should sue you for a mistake you make in the course of doing your work. General liability does cover bodily injury and property damage claims, but typically excludes litigation involving professional negligence or charges of failing to perform professional duties. For that, you need a separate professional liability insurance policy.
So, what kinds of risks does E&O insurance cover?
E&O coverage is triggered when your client alleges that you or one of your employees made a mistake in the course of providing IT services or IT project management services. For an IT project manager, a client could claim that you’re responsible for a software design error that results in a system that does not perform as intended, or even for a project that takes longer than anticipated, causing costs to escalate or causing the client to lose business.
Of course, some types of business disputes are simply uninsurable, such as if the client fails to pay a bill or someone sues you for stealing a customer. That’s why it’s important to understand exactly what your E&O policy does cover, so that you can avoid these types of risks or employ legal contracts to cover them. It is also important to remember that E&O insurance is designed to defend you and pay legitimate demands for financial compensation from a client. An E&O policy will not reimburse you or compensate you for your internal costs to correct a problem.
I don’t plan on making any mistakes that will get me sued. Do I really need E&O coverage?
The odds that you will be sued are statistically low. However, most business owners eventually reach a point where the risk of going without E&O insurance doesn't justify the savings. In a typical IT project, are there elements beyond your control? What happens if a subcontractor misrepresents their abilities and derails a project? If a developer makes an error in a line of code that causes the client to lose money? If the backup strategy you so carefully designed falls through due to human error, and important data are lost? If the contract is in your name, you’re the one who will be held responsible.
The fact is, you don’t have to make a mistake to get sued. Any client can sue you at any time, and regardless of whether that suit has merit, you’ll have to pay for a legal defense. Nearly everyone has had a client that is difficult, even unreasonable. When you’re blindsided by a lawsuit and don’t have the money in your budget to defend yourself, it can threaten your ability to stay in business. Even when you do your best work, other variables can affect the risk.
How much does it cost?
The cost of E&O insurance will vary depending on your company’s revenues and location, as well as the limits of liability and deductible you choose. Most one- or two-person firms can get $1 million in E&O insurance for around $1,000 per year. For most independent IT project managers, that is less than 1 percent of gross revenue, and the peace of mind that maintaining E&O insurance brings is often well worth it.
If you're not sure it is time to protect your technology business with E&O insurance, it doesn't cost anything to talk to an insurance broker to learn what your options are before you make a decision. Contact a technology insurance agent for a specialized quote.
Writtten by Brenna Lemieux - check her out at Google+ or Twitter