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What happens if you change your errors and omissions insurance policy limits?

Large client contracts often require high errors and omissions insurance limits. But can you raise or lower your limits when you land a big contract, or if you're working on smaller projects? Here’s the lowdown on adjusting your errors and omissions policy limit.

What is a policy limit?

A policy or coverage limit is the maximum payout your insurance provider will make on your insurance policy.

Errors and omissions insurance (E&O), also known as professional liability insurance, often includes two types of policy limits.

The aggregate limit is the total amount your provider will cover for the policy term (usually one year). The per occurrence limit is the amount your provider will cover in a single claim.

Will your insurance provider penalize you for changing your limit?

Insurance companies don't usually view multiple changes to your E&O policy as a cause for non-renewal.

However, it’s generally better to maintain a consistent level of coverage during each policy term, unless a client contract specifically requires an increase.

Any changes in coverage limits are best handled during policy renewal.

How often can you change your policy limit?

Different insurance providers have different rules for how often clients can change their E&O insurance policy limit during a policy term. Of course, they aren’t going to block a limit increase if it’s required by a client contract, but they might request a copy of the contract to confirm the reason for the increase.

Insurance companies are sometimes uneasy about unexplained policy limit increases. Their concern is that a request to increase coverage may be driven by an incident that’s already occurred. They don’t want to increase the amount of coverage when there’s already a potential or pending claim on the table.

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When does the new policy limit go into effect?

A new policy limit usually goes into effect immediately, even if you make the change in the middle of your policy term. This makes it easy to get the right coverage for new client contracts, regardless of when you close the deal.

Unfortunately, making a technology E&O claim under the new limit isn’t always straightforward.

If you increase coverage, your provider will often apply the old limit to any claim related to an incident that occurred before the change.

For example, let's say your tech business raises its policy limits after a client experiences a data breach, but before you file a claim for the incident. If the client sues you after the increase, your provider may still apply the previous, lower policy limit.

If you decrease coverage, your provider could possibly apply the new limit to any claim that 's filed after you make the change.

Say, for example, that the data breach occurred when you had a higher policy limit, but the client sues you after you decrease coverage. Your provider might apply the new lower policy limit when you file a claim for the incident.

Be sure to ask your insurance provider how they handle these types of claims before you change your policy limit.

What’s a good policy limit?

The cost of a professional liability lawsuit can add up quickly. The average contract dispute, for example, costs businesses $91,000 in legal fees. These costly lawsuits often blindside businesses, which makes it difficult to predict how much E&O coverage you may need in the future.

To estimate your potential risk, take a look at the size of the contracts you work on, as well as how critical those projects are to your clients. Small contracts might suggest lower liability, but mission-critical projects can increase risk.

For example, say that you’re working on a small project, but a hiccup could prevent your client from processing payments for an extended period of time. Depending on the size of the client, the financial loss – and your liability – could be substantial.

Most tech companies purchase E&O policies with a $1 million aggregate limit, which is the standard amount required in most client contracts.

For help determining the appropriate policy limit for your business, contact your insurance agent.

If you let your E&O policy lapse, will it affect your future coverage?

E&O insurance is a claims-made policy, which means that it will cover lawsuits only if the policy is active both when the incident occurs and when your business files the claim. With few exceptions, once an E&O policy lapses, your coverage is lost.

If you let one policy lapse before purchasing another policy, the new policy will only cover incidents that happen after the new policy’s retroactive date.

Unless you add prior claims coverage to the new policy, you won’t be able to make a claim for incidents that happened before you purchased the new policy, even though you might have had active coverage at that time.

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