Errors and omissions insurance
Errors and omissions insurance
Errors and omissions insurance (E&O), also called professional liability insurance, protects your business when a client sues over a mistake or oversight – whether or not it was your fault.
Why do you need errors and omissions insurance?
Errors and omission insurance, also called professional liability insurance, protects your company from the high costs of a lawsuit related to unsatisfactory work, including legal fees and settlements.
The fact is you might earn a living by providing professional advice or services, but it could also put you in the crosshairs of a client lawsuit. Any business that offers advice or services should consider errors and omissions insurance.
Even if you have several years of experience or are highly trained, accidents and mistakes are bound to happen. An E&O policy gives you the necessary financial protection to keep your business afloat during these instances.
E&O insurance covers:
- Work errors and oversights
- Undelivered services
- Incomplete work
- Missed deadlines
- Budget overruns
- Breach of contract
- Accusations of negligence
What does errors and omissions insurance cover?
Unhappy customers are a fact of life in business. But when a customer claims your mistake or negligence cost them money, you may end up in court.
E&O insurance covers you against:
Professional negligence
Errors and omissions insurance protects companies against accusations of substandard work and professional negligence. If a dissatisfied client files a negligence lawsuit, it can pay for your legal defense costs, including attorney fees and court costs, as well as the eventual judgment or settlement.
Example: An IT staffing firm supplies an employee to a large real estate marketing company for a role in database administration. The employee lacks the basic skills necessary to fulfill the role, but the company only finds this out after signing a contract. The tech company sues the staffing firm for negligence.
Errors or incomplete work
Mistakes and incomplete work can lead to a lawsuit if they cause a client to lose money. E&O coverage can pay your legal expenses from lawsuits stemming from errors and oversights.
Example: An app developer builds an Android app for a big tech company. After the app's release, it becomes clear that the app performs poorly on certain devices due to mistakes in the code. The tech company sues the app developer over the issue.
Breach of contract
When a company enters a contract with a client, it's hard to keep track of all the fine print. Sometimes projects go over budget or require more work than initially agreed upon.
If a breach of contract results in a lawsuit from the client, your E&O policy can help cover the legal expenses and resulting judgment or settlement.
Example: A computer repair shop signs a contract to maintain a business's laptops whenever they need updating or repairs. When a new Windows update comes out, the business expects the repair shop to purchase the update for all of their machines.
The shop refuses, saying that it couldn't be expected to pay for new operating systems for the laptops. The business sues the repair shop over breach of contract.
Missed deadlines
When a company misses an important deadline, it can mean lost profits for your client. E&O coverage can help pay for lawsuits over missed deadlines and project scope disputes.
Example: A web design company is tasked with building a website for a real estate agent's new agency. When the project takes longer to complete than promised, the real estate agent sues the web design company over the potential lost profits.
How much does errors and omissions insurance cost?
Errors and omissions insurance has an average cost of $61 per month, or $735 per year. But you could pay more or less depending on your risks.
The cost of E&O depends on:
- Your location
- Your profession’s level of risk
- Your coverage limits and deductible
- Number of employees
- Past liability claims (i.e. claims history)
- Business size
Who should get errors and omissions insurance coverage?
Any company that provides a service to a client can be accused of inferior work or miss a deadline due to unexpected delays. If a client sues, the costs can do serious damage to your small business – whether or not you’re at fault.
Bottom line, any small business owner that provides professional services could benefit from this policy as part of its risk management plan. And that’s doubly true if your inadequate work or mistake causes a client financial loss.
That's why errors & omissions is especially crucial for technology and software businesses, including:
IT professionals
E&O insurance covers IT professionals from lawsuits over contract disputes, coding errors, and more. Some clients will require IT companies to prove they have an active E&O policy before they agree to work with them.
For example, a client hires an IT consultant to create a customer database, but due to a coding error, hundreds of customers are missing. The client believes they suffered a loss of income because of this mistake and files a lawsuit. An E&O policy would help pay for the IT consultant's legal fees.
Software developers
E&O for software developers protects against lawsuits over software bugs, missed deadlines, or programs that don't meet client requirements.
For instance, suppose a software developer signs a contract to create a training program for an educational consulting company. However, the client is not satisfied with the finished product and decides to sue. E&O insurance would cover the software developer's legal costs.
Cybersecurity experts
An errors and omissions policy helps pay for lawsuits over mistakes by cybersecurity experts. This includes software that don't meet client requirements, failure to deliver a solution on time, or coding errors in security software.
For example, if a cybersecurity professional agrees to implement a multi-component cybersecurity program for a client, but takes longer than expected, then E&O insurance would provide financial protection if the client sues over the missed deadline.
SaaS companies
Errors and omissions coverage helps pay for lawsuits related to service downtime and disruptions, such as an outage that causes clients to lose money. It also provides financial protection for software that doesn't meet a client's expectations or is not provided on time.
For instance, suppose an SaaS company provides cloud-based software that enables clients to perform online transactions. When the service goes down for two days, your clients lose out on transactions, and sue your company to recoup their losses. E&O insurance would help pay for attorney's fees and any other legal costs.
Errors and omissions insurance (E&O) is a tech expert's best defense against accusations of mistakes or oversights.
What isn't covered by errors and omissions insurance?
Client property damage
An errors and omissions insurance policy won’t protect your business if someone sues over damaged property. General liability insurance, included in a business owner’s policy (BOP), covers third-party lawsuits over property damage.
Read more about the differences between general liability and errors and omissions insurance.
Employee theft
While E&O/professional liability insurance covers lawsuits over negligence and mistakes, it does not protect against criminal acts by employees. If an employee steals from a client, including via electronic transfer, fidelity bonds will reimburse the client.
Cyberattacks and data breaches
E&O insurance by itself won't protect you if a client sues over a data breach. However, it's often bundled with cyber liability insurance in a package called tech E&O insurance.
Tech E&O can help pay for lawsuits from clients who blame your business for failing to prevent a cyberattack or data breach, especially if it involves exposure of sensitive data. If a provider doesn't offer this bundle, you may need to purchase cyber liability insurance as a standalone policy.
Client injuries
Though E&O provides coverage for mistakes, it doesn’t cover client bodily injuries. When an accident in your office affects a client or visitor, general liability insurance can help pay for medical bills or legal expenses if the person sues.
Employee injuries and illnesses
If an employee gets injured or ill due to their working environment, E&O insurance won't cover their medical bills.
Instead, you'll need workers' compensation insurance, which pays for medical expenses, disability benefits and other related costs after an employee experiences a workplace injury or illness.
Other common questions about errors and omissions insurance
How do you get a certificate of insurance?
TechInsurance is a trusted insurance expert for all small businesses, including contractors and consultants, with extensive knowledge of the IT sector.
With TechInsurance, you can easily download a certificate of liability insurance for your small business, often on the same day you buy errors and omissions coverage or another insurance product.
This comes in handy for companies and consultants that need proof of insurance to sign a contract or a lease and don’t have time to call an insurance company for documentation. Clients and landlords may ask for a certificate of errors and omissions insurance to show you’re insured.
What is the difference between errors and omissions insurance and professional liability?
The short answer is there is no difference.
Different industries use different terms for the same type of coverage. You may also see errors and omissions insurance called professional liability insurance or medical malpractice, even though they’re identical except for the name.
Read more about the differences between errors and omissions insurance and professional liability.
Why is it important to keep your E&O insurance policy active?
It’s tempting to drop your business insurance once you stop working for a client, get a full-time job, or retire, but for E&O that’s a big mistake. Errors and omissions insurance is a claims-made policy. That means you’re only covered if your insurance policy was active both when an incident happened and when the claim was filed.
For example, say an IT consultant buys E&O for coverage when helping a client try and win a big grant. The consultant lets the policy lapse after the client submits a grant application. Three months later, the grant is denied. If the client sues the consultant, the insurance company won’t help since the policy period has ended.
That’s why it’s crucial to keep this type of insurance active – even when you think you no longer need it.
Luckily, if you need coverage for past events, you have options. Ask your insurance company about setting a retroactive date for coverage when you apply.
What are some exclusions to an E&O policy?
E&O insurance has exclusions that limit the scope of its coverage. For example, it won't pay the legal defense for lawsuits that allege your business discriminated against or abused its clients.
It also only covers the cost of lawsuits filed against your business. That means if you file a lawsuit against a client over a contract dispute or other issue, it won't be covered.
Your policy will cover claims that you file while the policy is active for incidents that occurred after you purchased coverage. If you need continuous coverage, you can add prior acts coverage to your policy.
You can fill other gaps in your E&O coverage with insurance endorsements. To make sure you have the right coverage, contact a TechInsurance insurance agent.