Errors and Omissions Insurance (E&O)
Professional Liability Insurance. Professional Indemnity Insurance. Errors & Omissions Insurance. PLI. Indemnity Insurance – It sounds either like these are all different kinds of insurance, or the insurance business hasn’t yet decided what service it is trying to provide.
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But don’t let that give you any thoughts that the need for this kind of insurance, whatever it may be called, is not an essential part of any business that sells services or advice to customers.
We can start by quoting Wikipedia, which is not trying to sell you anything:
Professional liability insurance (PLI) is also called professional indemnity insurance (PII) but is more commonly known as errors & omissions (E&O). In the US, it is a form of liability insurance that helps protect professional service-providing and advisory companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit.
For convenience from now on in this article, we will call it E&O Insurance, which is the shorthand way of saying Errors and Omissions Insurance. Still, in broad terms, all the names refer to the same product we are talking about here.
We want to make an essential first distinction between E&O insurance and Public Liability insurance. Here again, several different labels are used, like business liability insurance or commercial general liability insurance, general liability, and others. Again, they are talking about the same thing, which we call General Liability insurance. We have written quite extensively about this kind of cover for small businesses, but for convenience, include a quick summary of what it does, and how it differs from E&O insurance.
More about Liability Insurance
In the first place, we need to understand where any liability attributable to you and your business comes from. It’s important to remember that you must be aware of your ‘duty of care’. The law says that you have a primary responsibility when conducting business with any other person or company. You have a ‘duty of care’ to prevent any injury or damage to a third party of any kind.
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Your ‘duty of care’ makes it your direct responsibility to look out for the safety, security and interests of people who have come into your legal domain. You could end up having to pay out thousands of dollars in damages and legal costs.
Let’s start by identifying and quickly describing the various types of coverage that come under the broad heading of liability insurance.
General Liability insurance, in broad terms, covers personal injury or damage to the property of others. Some other items covered by general liability insurance include advertising errors, loss of reputation and more.
In most cases, general liability insurance does not cover work or personal injury. That’s why we recommend that you review the insurance coverage planned for your business.
As the term implies, personal injury is any injury or damage to a third party, such as a customer or visitor, or to their property by your services or company.
This is what public liability insurance will protect you from. It gives you insurance specifically designed to cater to the sort of accidental injuries and damages that can happen while you are engaged in your normal business activity.
Bodily injury and property damage liability is probably the most important part of general liability insurance. Suppose you have business visitors in the course of running your business. In that case, it provides protection against any claims of damage or injury while under your roof.
As for property damage coverage under general liability insurance, this protects your business from claims for third-party property damage.
Reputation damage applies to any activity by you or your employees that adversely affects another business. Consider what can happen when you compare your product to competitors who are economically disadvantaged for their business. In this case, the policy will cover all legal costs arising from the accident.
Claims of copyright infringement can be costly for your business, such as using copyrighted material without permission.
General liability insurance covers you from broad claims for personal and material damage resulting from the services you provide. It is mainly considered the first pillar of any type of business insurance, mainly because of the comprehensive coverage it offers.
In addition to property damage and injury, liability insurance may also cover medical and legal costs arising from claims related to your company’s products, services or operations.
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Professional Liability insurance, also called Error & Omissions insurance or Professional Indemnity insurance are all dealing with the same kind of liability. It’s just that different sectors and cultures have adopted different names for exactly the same type of cover over the years.
In the rest of this article, we may be using the three terms interchangeably since they all refer to the same thing.
What is professional liability insurance coverage?
The business world today has become a highly litigious environment. This makes it essential for service providers to get protection in case customers allege acts involving negligence, errors, or omissions. If the matter turns into a lawsuit, even if it was found to be without merit, the cost of defense can be substantial, and the impact on your reputation can be damaging.
You should consider purchasing Error & Omission insurance if your business offers the following:
- A professional service
- Professional advice to clients
- Contractual services.
If you or your business provides these professional services, you need professional E&O coverage because these services come with risks. You could be held liable for:
- breach of contract
- providing incomplete work
- providing substandard work
- work errors or oversights
- missing deadlines
In the event that your customer claims that any of these resulted in financial losses or reputational damage for them, then they could sue to recover from you all damages.
If the matter becomes a legal case, you need coverage for the associated attorney fees and court costs along with the actual settlements or judgments. And this could be for both your own associated costs, but for the other party’s as well if the decision goes against you.
Even if there was nothing wrong with the quality of your work, a difficult or dissatisfied client could sue your business over a perceived problem. In that case, you might win the lawsuit but still have to pay attorney fees and court costs out of pocket. Without professional liability / E&O insurance, a lawsuit could present a significant financial difficulty for your business.
Errors & Omissions insurance is an insurance policy for businesses that protect themselves against claims from their clients. Professional liability insurance often covers negligence, copyright infringement, personal injury, etc. This may include damage from things you did and/or had to do.
Common coverage includes:
- client damages arising from services provided by your company or by your company’s failure to provide such services when contracted to do so
- copyright law oversights or mistakes or misunderstandings resulting in copyright infringement
- reputational injury arising from libel or slander whether or not it was true
While this can help many types of businesses, let’s look at some real-life examples. Suppose you are managing a building project and accidentally forgot to give your client some required approval documentation. This may result in project delays costing thousands.
Or, on a more personal level, if you are a physiotherapist and your client is claiming they suffered some muscle damage during a treatment session. There are many such situations in which professional liability insurance can help.
What kind of business should have Public Liability insurance?
Any business that provides some service in return for payment. A typical list is:
The kind of business that need E&O insurance includes:
- claims adjusters
- computer consultants
- Construction and building maintenance contractors, general contractors, roof maintenance, plumbers
- land surveyors
- financial advisors
- transport provides such as Pet Taxi services
- pet services
- photography and printing services
- Amazon FBA sellers and e-commerce product vendors
Do you need E&O as well as General Liability Insurance?
The main reason for Errors & Omissions insurance, on top of GLI, is that general liability insurance only covers damage to any third-party person, their property, or advertising damage. Other insurances are also available for product liability.
However, customers using your professional services and advice can make legal claims without citing any specific damage covered by those other policies. The more common claims under professional indemnity insurance include negligence, misrepresentation, breach of good faith, and bad advice.
- If a software product does not work, it doesn’t cause any physical or personal damage. Therefore, general liability insurance does not come into play. However, sudden financial losses may occur for the customer due to software distortion regarding promised product features.
- Suppose a customized product you provided fails, affecting only the product itself. In that case, a product liability policy may cover consequential damages such as loss of the customer’s time, lost business and so on, but not usually the cost of redesign or replacement. Claims like this against the designer can be covered by professional indemnity insurance.
Do you need Error & Omissions insurance?
The whole need for PLI / E&O / PI insurance is that by providing professional services or professional advice, you become subject to your customers’ reactions.
Even though you may be confident that there was nothing wrong with your work, any dissatisfied client, even if it’s simply one who is by nature challenging to please, could sue your business over what they claim to be a defect.
You may end up winning the case if it gets to court, but you may still be liable for your own lawyer’s fees and the court costs out of your own pocket. With professional liability / E&O insurance, all the ramifications of a lawsuit are removed from your business.
A different way of answering this question is to rephrase it. What else could happen if you decide not to take E&O insurance, besides the liability for customer claims.
Error & Omission insurance flags your business as being more responsible, reliable, and trustworthy. You stand out from the uninsured competition. It’s simply good for business, and business activity can suffer without it. Potential customers may inquire if your company carries this policy before they engage your services.
It assures them that their own potential losses can be recouped if the project doesn’t go as planned. So in this sense, Errors & Omissions insurance is a positive step to take in building up your business.
What should I consider in choosing my Professional Liability insurance policy?
The four essential factors to consider when choosing your Errors & Omissions insurance coverage are:
the cost is probably the primary factor in considering which company you go for. However, be careful to ensure that looking at a lower premium doesn’t give you inadequate coverage.
What is covered and what is excluded
For example, your insurance may be covering you for “Professional Services.” It means the work done for customers in your daily business as a general contractor, a handyman, roofing or fencing installer, solar panel installer and any other skilled occupation.
But an accident driving on the way to the customer site, or any accidental damage to things on site is not covered. Most policies exclude covering you for up-front prepayments, if customers demand some of their money back.
Many business owners try to trust that those pesky customers will simply go away on their own, but in the real world, claims like these can stretch out for months or even years and the longer it lasts, the greater your exposure to enormous legal costs.
The policy limit declares how much the insurance company will spend in the total coverage period to defend claims. The first limit specifies the maximum amount covered in a single occurrence. Then the second limit states the aggregate of all claims over the entire policy period.
For example – a one-year policy with $20,000/$50,000 limits will cover any individual claim in that period up to $20,000. It will cover your business for a total of $50,000 over the course of the whole year.
Most insurance companies set conditions regarding the split of who pays what in the event of a claim. The purpose of this is to eliminate frivolous claims that would cost the company more in administration than the whole claim amounts to.
You can use this to your advantage because if you know your own business area and clientele better than the insurance company, you could agree to higher deductibles in return for reduced premiums. This allows you to reduce costs while keeping a cap on your exposure to any grave risk.
One of the significant components of professional litigation is the attached costs coming from the legal activity on both sides of the case – from the claimant’s side and from your own legal defense.
This is really a can of worms because although you know how much you are exposed to on a job-by-job basis, there is no way you can predict where a court case is going to end up, or what the decision is going to be, or how many lawyers are going to have their fingers in the pie.
How much Error & Omission insurance do I need?
Obviously, the cost will depend on the specifics of your business, the location, the level of cover you choose and many more.
You can find hundreds of reputable insurance companies, agents, and brokers in your own state that can advise. As a starting point, we have surveyed most markets, and find that a monthly premium of around $50 should give a small business enough cover for the type of risk that can be anticipated.
This provides $25000 for a single occurrence / $50000 aggregate for one year. If you are a building project designer, you may be paying closer to $150 per month, whereas a photographer or handyman you could be paying just $20.
Error and omissions are a built-in risk in all types of business. Whereas the cost of insuring against a professional liability claim is relatively minor, the benefit it brings is very substantial. It should be a no-brainer for any business owner that E&O liability insurance, along with general liability insurance, are must-haves.