What is Errors and Omission Insurance (E&O)?
Errors and Omission (E&O) insurance protects companies and employees from claims of negligent actions or inadequate work from clients. E&O insurance is a type of professional liability insurance and is typically required by people who provide professional services to their clients.
- Errors and Omission (E&O) insurance falls under the category of professional liability insurance (PLI). It protects companies and employees who provide professional services from the claims of negligent actions or inadequate work from clients.
- The industry, geographic location, revenue, business size, policy coverage limits, etc., can impact the cost of E&O insurance. Higher rates are typically applied to companies with a higher risk of lawsuits.
- In general, E&O insurance covers work mistakes and oversights, accusations of negligence, undelivered services, and missed deadlines.
Understanding Errors and Omission Insurance
It is not rare that professionals who provide services need to face claims initiated by their clients. Thus, they need professional liability insurance (PLI) to protect themselves from such claims. The coverage of PLI includes misrepresentation, malpractice, or negligence. Errors and Omission (E&O) insurance is one of the many forms of PLI, which protects against claims of negligent or inadequate work.
Any companies and individuals that provide professional services or advice need E&O insurance. Examples include doctors, lawyers, financial planners, insurance brokers, engineering firms, and so on. E&O insurance can cover the claim settlements up to the amount pre-determined in the insurance contract. It usually covers court costs as well, which can probably be very high.
For example, an investment management firm made a mistake while calculating portfolio attribution metrics. It led to a wrong asset allocation decision and thus an investment loss. Clients could claim damages from the firm for the loss. If the investment firm had taken out a robust E&O insurance policy, the insurance company would have covered the legal expense and the damage settlements.
Several factors impact the rates of E&O insurance, including the industry, geographic location, revenue, business size, policy coverage limits, etc. Certain industries are more exposed to lawsuit costs than others. For example, construction firms typically face higher E&O insurance costs since the mistakes that they make may cause much greater losses on property damage.
The larger the revenues, the higher the E&O insurance rates are, because the large size usually comes with a high risk of lawsuit and settlement cost. Typically, companies that provide adequate employee training and with a strong track record of avoiding claims can secure lower E&O insurance rates.
What Does E&O Insurance Cover?
The coverage of Errors and Omission (E&O) insurance may vary slightly across different insurance providers, depending on the insurance policies. In general, E&O insurance provides coverage to work mistakes and oversights, accusations of negligence, undelivered services, and missed deadlines. Clients may try to recoup losses caused by work mistakes and errors by professionals. A mistake made on the return rate of a financial product by a financial planner can be an example.
Accusations of negligence can be made when a business fails to meet the minimum standard of the industry. A dissatisfied client might accuse the business of negligence even though there are no mistakes made.
If a taxation firm fails to make tax payments for its clients as identified in the service contract, it is known as undelivered services. An insurance agent failing to make adequate insurance coverage for a client can be another example.
Missing deadlines may cause great revenue losses to clients. For example, an advisor missed the deadline of providing the due diligence report to a private equity investor. It led to the investor failing to make the bid. The E&O insurance would cover the lawsuit costs if the investor sued.
What Does E&O Insurance Not Cover?
The claims out of the scope of E&O insurance include customer injuries, employee injuries, contingent bodily injuries, employee discrimination claims, as well as damage to business property or customer property. The claims are covered by other types of insurance policies for professionals.
Customer injuries and property damage is covered by general liability insurance. Employee injuries are covered by workers’ compensation insurance. Contingent bodily injuries are covered by product liability insurance. Employment practices liability insurance (EPLI) provides coverage to employee discrimination suits claimed by employees against the company. Also, E&O insurance does not cover criminal prosecution or misconducts made with malicious intent.
Many E&O insurance policies do not provide coverage to temporary employees, claims made in various jurisdictions, or claims made on the work done before the insurance is in place. Businesses need to understand the policy terms and coverage when signing for an E&O insurance contract.
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