What Is Errors and Omissions (E&O) Insurance?
Navigate professional liability with Errors & Omissions (E&O) insurance. Understand its coverage, who it protects, and how it safeguards your business.
Errors and Omissions (E&O) insurance protects professionals and businesses from financial losses due to claims of negligence, errors, or omissions in their services. This specialized liability coverage safeguards a practice’s financial stability when a client alleges a mistake in provided services caused them harm. Unlike general liability, E&O insurance specifically targets liabilities related to professional services.
Understanding E&O Coverage
E&O insurance protects against professional failures or mistakes that can lead to financial detriment for clients. It covers claims alleging financial harm due to negligence, errors, omissions, misrepresentation, inaccurate advice, or a breach of contract related to professional services. When a claim is filed, this coverage typically pays for the policyholder’s legal defense costs, including attorney fees and court expenses, and can also cover settlements or judgments awarded to the client, up to the policy’s specified limits.
It is important to differentiate E&O insurance from general liability insurance, as they cover distinct types of risks. General liability policies primarily address claims of bodily injury or property damage occurring on the business premises or as a result of business operations. In contrast, E&O insurance focuses exclusively on financial harm directly resulting from the professional services delivered by the insured, rather than physical injury or property damage. Common exclusions from E&O coverage include intentional wrongdoing, fraudulent acts, criminal behavior, and claims that existed prior to the policy’s effective date.
Professions Requiring E&O
Many professions commonly require E&O insurance due to the inherent risks associated with providing specialized advice or services. These include:
Accountants: Errors in tax preparation, financial reporting, or auditing can lead to substantial financial penalties or losses for clients.
Legal professionals: Claims can arise from incorrect legal advice, missed deadlines, or procedural errors that negatively impact a client’s case.
Consultants (management, IT): Exposure exists if recommendations or system implementations fail to perform as expected, causing financial setbacks.
Real estate agents and brokers: Protection is needed against claims like misrepresentation of property features or errors in contract documentation.
Architects and engineers: Coverage is important for potential design flaws, calculation errors, or construction oversight.
Financial advisors: Improper investment advice or mismanagement of client assets can cause significant financial harm.
The E&O Policy and Claims Process
An E&O policy includes several key components that define its scope and protection. Policy limits specify the maximum amount the insurer will pay for covered claims, typically comprising an aggregate limit (the total payable over the policy period) and a per-claim limit (the maximum payable for a single incident). A deductible, also known as self-insured retention, is the amount the policyholder must pay out of pocket before the insurance coverage begins for a covered claim.
Most E&O policies operate on a “claims-made” basis, which means the policy must be active both when the alleged error or omission occurred and when the claim is reported to the insurer. This differs from “occurrence-based” policies, which cover incidents that happen during the policy period regardless of when the claim is reported. Understanding this distinction is important for ensuring continuous coverage, especially when switching insurers or retiring from practice.
When a professional receives notice of a potential claim, the process begins with promptly notifying the insurer according to the policy’s terms. The insurer then investigates the allegations, often requesting documentation and statements from the policyholder. The insurer provides legal defense, appointing and paying for attorneys to represent the policyholder in court or during negotiations. They manage the legal strategy and cover defense costs within policy limits, after the deductible is satisfied, working towards a resolution through settlement or litigation.