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The Ins and Outs of E&O Insurance

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Professional mistakes are a common reality for businesses. To protect against them, it’s a good idea to invest in the right type of insurance.

One of those insurance types, E&O or errors and omissions insurance, protects your company, your employees, and your subcontractors (sometimes) from claims of financial damages because of incomplete, inadequate, or unprofessional work or negligent actions. In other words, E&O protects you or your company in case a client sues claiming you failed, or omitted, to provide a service or made errors in the service your provided.

Errors and omissions insurance is important because it protects your company if your unhappy client sues you, regardless of whether the accusations are true or not, or if there was no actual breach of contract. For example, your company may perform a service to the letter exactly as it was agreed upon, but the result may not be up to the client’s imagined expectations—and so they sue.

Thanks to E&O insurance, claims of a perceived contract breach, failure to fulfill expectations, or failure to provide a service can be softened thanks to coverage that will pay the expenses of any lawsuit that drags out. Several legal costs could include court expenses, court-ordered compensation, lawyer’s fees, settlement amounts, or expert witness fees. Even the most frivolous lawsuits could cost tens of thousands of dollars in legal costs and could potentially bankrupt smaller companies, organizations, and professional individuals without E&O insurance.

Because of the steep cost of legal fees, and the near-certainty that at some point mistakes on the job will be made, companies should strongly consider E&O coverage, no matter the field they operate in. If you are an accountant, architect, contractor engineer, or any other type of service provider, then you’re likely already aware of the risks or perceived mistakes that could potentially occur in your line of work. But other companies like tech startups or web hosting firms should also look into coverage in case they are blamed for downtime or outage of services. Often, many contracts require errors and omissions insurance as proof that your company can pay when things don’t go as planned.    

An important thing to keep in mind regarding E&O is that most policies are on a claims made basis.  This means the claim trigger is when you are made aware of the claim not when the claim occurred. Lawsuits can take place long after the initial service or work has been completed, so when buying errors and omissions insurance, it’s important to keep in mind that continuous coverage is imperative. If you decide to sell your businesses or cease operations, you can purchase an extended reporting period or “tail” which allows claims to be reported after the policy has expired and occurred prior to the policies expiration.  

In short, if clients make claims for financial damages due to perceived mistakes, errors and omissions insurance will be there to ensure your company’s assets are protected and legal expenses are covered. For any questions regarding E&O and potential policies for your business, reach out to us for more information.  

Dominic Piccirillo