Understanding E&O in Plain English

by Mike W. Smith, President

What Is Errors And Omissions (E&O) Insurance?

Errors and Omissions Insurance is business liability insurance for professionals such as insurance agents, real estate agents and brokers, architects, third party administrators and other business professionals.  An error or omission,  a mistake, which causes financial harm to another, can occur on almost any transaction in any profession. This type of insurance (E&O) helps to protect a professional, an individual or a company, from bearing the full cost of defense for lawsuits relating to an error or omission while providing their Professional Services to others. This is a separate coverage from a standard general liability or property insurance policy.

Errors and Omissions Insurance may be referred as any of the following: E&O,  E&O Insurance,  Errors and Omissions or Professional Liability Insurance Malpractice (legal and medical professionals)

What Does Errors and Omissions Insurance Cover?

All E&O insurance policies are unique and therefore have different coverages and exclusions. However, in general E&O insurance is designed to help pay for defense costs and the damage awards associated with professional liability claims. Even the most diligent professional can be held liable for a professional error, omission or mistake. Defense costs are a significant portion of the cost of an errors and omissions insurance policy. It is not uncommon for a professional to spend thousands of dollars on defense costs for a matter that ultimately gets dismissed.

A Professional Liability claim must allege negligence in either the performance of or failure to perform Professional Services. Errors and omissions insurance policies have a specific limit of liability and usually include both legal costs and damage awards in a single limit. E&O insurance does not cover intentional, fraudulent or illegal activities or in most policies, punitive damages.

Remember all policies are unique, therefore not all claims may be covered in a policy and you should read your policy very carefully.

Why Should My Firm Purchase Errors and Omissions Insurance?

Lawsuits are not just about negligence; they are about allegations of negligence. We live in a litigious environment where any professional can be sued. Many innocent parties are brought into a suit simply because they are part of a transaction. In other words, the alleged error or omission does not have to be your error or omission. Defending the reputation of your business, whether the allegation is frivolous or not can still result in lost productivity and legal costs exceeding hundreds of thousands of dollars.

Errors and Omissions Insurance allows you plan ahead and transfer a portion of the risk of unpredictable legal expenditures to the insurance carrier, reducing the financial impact of an allegation against your business.

How Much Does E&O Cost?

Errors and omissions insurance premiums are based on several factors: Type of Professional Services Provided, State where Services are Provided, Size of Limits, Annual Revenues, Number of Professionals Providing Services, Loss / Claims History, and Type of Policy.

Do not be fooled by price alone. You could find yourself purchasing a cheaper policy that excludes all the Professional Services you provide. This of course would render the policy useless. Remember, defense costs are a significant portion of the cost of an errors and omissions insurance policy and a professional can easily spend thousands of dollars on defense costs for a matter that ultimately gets dismissed.

Each E&O insurance carrier has a different policy form and different exclusions. A properly structured E&O policy will offer your business proper protection with a competitive price for those coverages.

How Do I Find the Right Errors and Omissions Insurance Policy?

The first step to finding the right Errors and Omissions insurance policy is to find the right Professional Liability insurance agent. You would not use a tax attorney to defend a civil suit; likewise you should not use a workers' compensation insurance agent to find the right E&O insurance policy for your company.

You should use an agent that specializes in E&O insurance to review your Professional Liability risk. Interview your agent and assess their qualifications and understanding of the industry. A Professional Liability agent or broker should have specific knowledge in dealing with your specific type of industry, have the requisite background and access to specialized insurance markets to assist you. Do not be afraid to ask for references.

When choosing the right E&O insurance policy you and your agent should work together to consider several factors, including:

1. What Professional Services do you provide? An E&O insurance policy should cover the specific Professional Services you provide. For example, are you a residential or commercial real estate agent, a life or property casualty insurance agent or even a structural or design engineer? It makes a difference in the policy you choose. Your errors and omissions insurance policy should spell out specifically the Professional Services you provide.
2. What is the legal structure of the business offering the Professional Service? Depending upon whether you are a Sole Proprietor, Corporation, Partnership, Limited Liability Company or other entity will determine who is covered under your errors and omissions insurance policy. For example, corporations have shareholders whereas LLCfs have members. Not all E&O policies address such issues correctly.
3. What Professionals are Performing Services on Behalf of our Company? Companies use a myriad of legal structures to fulfill their obligations. For example, companies can use employees, independent contractors, outside firms and other combination of professionals to fulfill a contract. Many policies do not cover services provided by independent contractors or others outside the corporate entity. Some policies will cover the services of independent contractors, but will not cover the independent contractor. In a real estate organization, for example, nearly all of the sales staff are likely to be independent contractors. An errors and omissions insurance policy that excludes coverage for independent contractors would leave the business at risk.
4. What Professional Services are provided by or to Related Parties? Some companies provide Professional Services to related parties. An example of a related party would be a real estate agency, where the real estate agency also manages a property owned by the broker. In an insurance agency, a related company might process claims. In both cases, with the wrong errors and omissions insurance policy, the insured would be left unprotected.

How do I get an errors and omissions insurance policy?

Determining if you can get an errors and omissions insurance policy is a relatively easy process. It starts with filling out an application for E&O insurance, which typically will ask for information such as name, address, type of business, annual revenues and something about your business. An application may also require financial statements or management bio's depending upon the industry or company size. The underwriters need to understand what they are insuring.