Errors and omissions insurance, also known as professional liability or E&O insurance, is designed to protect you against a client's claim of negligent acts, omissions or errors you make while performing professional services. In the event of a covered claim, these policies will pay for legal defense costs as well as any settlement to be paid to the client, if it is agreed or determined by a court that your company was negligent.
While E&O insurance has saved many a business from bankruptcy, it’s important to understand that E&O insurance policies often have specific exclusions. Your insurance company will not defend you or pay any costs related to a claim that’s excluded from your policy coverage, such as intentional wrongful acts or illegal acts, as well as many business disputes. No one wants a surprise when there is a lawsuit from a customer, so it's critical to understand in advance just what kinds of situations are excluded from your policy .
Common E&O Policy Exclusions
Below are some common E&O exclusions. This list is fairly general and does not refer to a specific insurance company's policy. Some of the items listed may be covered by one policy, but not another. In general, professional liability insurance policies do not cover:
- Malicious, dishonest, criminal or illegal acts, including intentional violation of any law, regulation, statute or ordinance
- Services you might provide under the name of any other business, charity or organization that is not named in the policy as a covered insured
- Liability for damages against or on behalf of any other insured on the policy (i.e. if your partner sues you or your company, the policy won't respond)
- Copyright, patent or trademark infringement (may be available on some policies)
- Bodily harm to any person, including sickness or death (there may be coverage under general liability insurance)
- Damaged property, or loss of use resulting from such damage (there may be coverage under general liability insurance)
- Libel or slander (may be available on some policies)
- Illegal discrimination
- Violation of any securities act
- Humiliation, imprisonment, wrongful entry, eviction, invasion of privacy, malicious prosecution (may be available on some policies)
- Extraordinary liability assumed under contract (unless the liability would have existed even in the absence of the contract)
- Failure to secure, provide, advise or maintain financing or other monies (unless you have a financial services/investment advisor policy)
- Punitive fines, penalties or damages
The key is to have a good understanding of the types of professional liability risks your company faces, and to look for a policy that addresses most, if not all, of those risks. The risks that can't be insured, or that you chose not to cover with insurance, have to be accepted as part of the risk of doing business or must be managed in some other way. Be sure you know your risks.
Filling in the Gaps
Claims that are not directly related to your performance of professional services are not covered by errors & omissions insurance, but there are ways to fill in some of those gaps. You may be able to purchase different kinds of insurance to mitigate some types of exposures.
For example, a commercial general liability policy covers claims of bodily injury or property damage, and is often packaged with property insurance to cover theft or damage to your business property or your clients’ property that is in your care, custody or control.
If you have employees, you might also consider fidelity or commercial dishonesty bond coverage, also known as employee dishonesty insurance, which provides coverage if one of your employees steals money, equipment or other assets from you or one of your clients.
Insurance is just one part of a comprehensive risk management strategy, so you may need to employ other tactics to mitigate risk exposure.