What Is Errors And Omissions Insurance?
Imagine this: You are a managed IT services firm that handles computer networking, software, telephony, cybersecurity, and various other outsourced IT services for small- to medium-sized organizations.
You discover that one of your clients – a law firm – has experienced a cyber breach that compromises the confidential records of all their clients spanning almost a decade. Forensic experts determine that the hacker infiltrated their computer system despite the firewall your employees set up.
The law firm may endure significant reputational harm and liability arising from the leaking of its clients’ data. In addition, they face employment liability due to the loss of employee information, as well as costs to hire experts and replace the computer system.
The problem is that general liability insurance only covers property damage and bodily injury. But in this scenario, there was neither property damage nor bodily injury.
The law firm is hardly alone. Many industries face the risk of their advice harming a client financially.
Errors and omissions insurance (E&O; it’s also called professional liability insurance or professional indemnity insurance) addresses coverage gaps found on commercial general liability policies. These gaps often occur when professional services harm a client but do not cause bodily injury or property damage.
Each industry has significantly different professional risks, so it is not surprising that E&O insurance policies are highly customized. Even those operating in the same industry will see vast differences between insurance carriers. It is important to know how to read the policy, know what most E&O policies cover, and learn about what goes into a quality E&O policy.
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What does E&O insurance cover?
Unlike a commercial general liability (CGL) policy, E&O insurance doesn't encompass all of your business activities. It targets the exposures that you disclose to the underwriter and is tailor-made to cover those risks. Here is where you should look to figure out what’s covered on your E&O policy or quote.
1. Look at the insuring agreement
The first area you should look at when discovering what an E&O insurance policy covers is the insuring agreement. This is an overarching statement that determines what is covered under the policy, and it’s usually one of the first sentences.
Here is an example insuring agreement:
The Insurer will pay Damages and Claims Expenses by reason of a Claim first made against an Insured during the Policy Period for a Professional Incident, which first occurs on or after the Retroactive Date and prior to the end of the Policy Period.
You’ll notice that some words are in bold and the statement is a bit vague. Those bolded words are terms that are defined in the definitions section of the insurance policy. This helps provide clarification as to what the insuring agreement actually says. For this example, you would look up the definition of "Professional Incident" to know what events are covered. These definitions are found in your insurance policy or quote.
Here is the policy definition of a professional incident in this particular policy:
Professional Incident means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty, including Personal Injury, actually or allegedly committed or attempted solely in the rendering of or failure to render Professional Services.
There you go! This insuring agreement and its relevant definition are the foundation for what’s covered under the E&O policy.
2. Check out the description of services on the declarations page
In the definition of "Professional Incident" above, we see a failure to render "Professional Services."
What is a professional service, though? Since it is a term that appears in a bold font, we can return to the definitions and see how the policy defines professional services.
"Professional Services means those services specified in the Declarations."
As we mentioned, E&O only covers the exposures you told the underwriter that you want covered.
You have to look at the declarations page of your policy or quote and make sure that the description of your services truly encompasses all that you do. This will generally be listed somewhere near the limits of insurance on the declarations page (the page with pricing and limits).
For example, if you’re a real estate agent and you handle property management for your investor clients, you need the policy to include both sales and property management.
What events would trigger coverage?
Now that you know what events are covered, here are the typical events that would trigger coverage under an E&O policy.
1. Demand For Damages
If you receive a written or non-written notice demanding something of you as a result of a professional incident – it doesn’t have to be monetary – you need to contact your insurance company immediately. They’ll help guide you through the process of responding to the demand and hiring a legal team to assist you in the resolution.
2. Civil Or Administrative Action
Any civil or administrative action taken against you as a result of a professional incident is a reason to contact your insurance company immediately. We recommend not waiting before contacting your E&O insurance carrier; if you make a mistake and don’t notify your insurance company, you’re putting them in an even worse position. If this happens, they can deny the claim.
3. Investigation
Investigations can be time-consuming and nerve-racking. E&O insurance will also assist you through the investigations process and subpoenas that you might have to comply with as a result of a professional incident.
Examples of E&O Insurance Claims
To better understand E&O insurance, when you need it, and what it covers, let’s look at a few real-life examples.
Failure To Disclose A Known Defect
Scenario: Jane is a real estate agent who is helping Mike and Lisa purchase a home. She shows them a house that seems perfect, and they buy it. Three months later, the basement floods during heavy rains. The couple learns there were prior issues with flooding that Lisa didn’t tell them about.
Claim: Mike and Lisa sue Jane for failure to disclose a known defect. They claim damages for the cost to repair the basement and the costs of finding a new place to live while the home was being repaired. They also want compensation for the lost value of the home: Now that they know about the flooding, they’ll have to tell potential buyers in the future, reducing the home’s value.
Inaccurate Advice
Scenario: XYZ Corp., a mid-sized electronics manufacturer, hires Sarah, a management consultant. Sarah advises the company to streamline its production process by cutting down on certain quality checks. XYZ Corp. implements the changes, but a few months later, a large batch of products is recalled because it has severe quality issues. The recall costs the company millions, not to mention reputational damage.
Claim: XYZ Corp. sues Sarah, stating that her advice directly led to the massive recall. They claim damages for the cost of the recall, the lost profits from unsold products, and the potential long-term loss of customers due to the hit to their reputation.
Professional Negligence
Scenario: Robert, an architect, designs a new library for a small town. The design is praised for its modern appeal and functionality. However, the construction company discovers that a significant load-bearing calculation was overlooked, making the design unfeasible without substantial modifications.
Claim: The town sues Robert for professional negligence. They claim damages for the costs associated with the construction delay and the additional expenses of altering the design mid-construction. The delay also means they’ve violated their contracts with their subcontractors, which could lead to lawsuits against them, and they also want to recover those costs.
Misrepresentation
Scenario: Emily is a financial advisor who advises her client, Mark, to invest a large portion of his savings into a promising new tech startup. She claims that while all investments have risks, this one has been vetted and shows substantial promise. A year later, the startup goes bankrupt due to mismanagement, and Mark loses nearly all his invested money.
Claim: Mark sues Emily, alleging that she did not adequately research the startup or properly convey the risks associated with such an investment. He wants to be reimbursed for his lost investment and any potential money he would have earned if he had invested in a more stable business.
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Common Exclusions and Limitations
Fraudulent Or Intentional Acts
The E&O insurance policy is designed to protect your business from honest mistakes that can arise out of regular business activity. It’s not meant to cover fraud or professional incidents that you intentionally cause.
Prior Knowledge
As with most insurance policies, an E&O insurance policy does not cover events you knew of prior to taking out the policy. The insurance company will almost always make you sign a warranty on the application that states that you are not aware of any circumstance that could lead to a claim.
Bodily Injury And Property Damage
E&O insurance does not cover bodily injury or property damage. As mentioned above, you generally obtain this policy to cover the gaps included in the general liability insurance policy, which already covers bodily injury and property damage.
Inaccurate Prices, Costs, Or Estimates
The E&O insurance policy does not cover if you bid a project too low and try to back out of the deal, resulting in a lawsuit or penalty. This is a business risk that you take; for the most part, it is uninsurable.
What businesses need errors and omissions insurance?
Companies That Give Professional Advice Or Recommendations
The most obvious companies that need errors and omissions insurance are those that provide professional advice and services. Almost every lawyer, accountant, insurance agent, and real estate agent has professional liability insurance, because it’s the primary risk in their business.
For instance, where a contractor would have a significant risk of someone getting physically injured from faulty work (a general liability claim), a lawyer has very little exposure to physically harming someone. What they do have is a big risk of their advice harming a client financially (an E&O insurance claim). An example would be mishandling a court proceeding, resulting in a large fine.
Companies That Design Structures Or Products
Architects and engineering firms are some of the largest purchasers of professional liability insurance products. They aren't the only ones designing structures or products, though.
Many companies provide these services, such as a contractor that provides certain designs related to their trade (i.e. an HVAC contractor recommending the proper units and installation design), or even a machine shop that draws up a design to replicate a certain part. If you take any part in the design of a product (whether as a contractor, engineer, manufacturer, or architect), you might have a professional liability exposure.
Companies That Build Or Manufacture Products Or Structures
Although contractors and manufacturing companies often do not carry the same E&O risk as other types of businesses, we recommend this coverage in certain instances separate from the design component.
These policies guard against errors like faulty materials, mistakes in material ordering, and in the case of manufacturing, mistakes in the finished goods, even if they only resulted in financial harm to the client (product liability requires bodily injury or property damage).
Companies That Program, Build, Or Provide Technology Products Or Services
Because programming and IT services have the potential to cause great financial loss to an organization, we suggest all technology companies purchase a technology E&O insurance policy.
Since an error in software or a misconfiguration doesn't directly cause physical damage or bodily injury, this is a coverage gap that many tech companies face if they only purchase general liability insurance. A technology E&O policy not only covers your advice like a traditional E&O insurance policy, but it will also cover errors in programming and technology configurations.
Companies In The Healthcare Field
Almost every company that directly treats patients in the healthcare industry needs medical malpractice. Your advice, or procedures you recommend that harm the patient, could lead to a malpractice lawsuit. These lawsuits are frequent and can sometimes lead to massive judgments. We highly recommend that you talk with a broker with experience writing coverage in the medical industry.
Errors And Omissions Insurance Cost
Errors and omissions insurance cost is highly correlated to the amount of risk that your business has. For example, a large contractor would pay less than a structural architect with the same amount of revenue. That being said, for most small businesses, we see these policies start at around $1,000-$,1200 for the year. They go up depending on the size and risk of your business.
Some specialized policies, such as technology E&O insurance, begin at around $500 for freelancers that do non-cyber security work. Examples of this work include web developers or digital advertisers.
Best E&O Insurance Carriers
E&O insurance can be complex. It’s important to work with a broker and insurance provider that have experience and a proven track record. LandesBlosch can provide quotes from some of the top E&O insurance carriers, including:
Berkley Management Protection
We always recommend Berkley Management Protection to businesses in lower risk industries that are looking for comprehensive insurance. The company has an easy application process, quality claims handling, and plenty of experience with a variety of professions and industries, including consultants, property managers, nonprofits, and much more.
CFC Underwriting
CFC Underwriting is one of our favorite carriers, in large part due to their top-tier coverage form, how easy they are to do business with, and their broad expertise. Like Berkley Management Protection, they have a product for lower risk E&O industries, but they also insure much higher risk industries such as construction, engineers, accountants, and oil and gas contractors.
RLI
RLI is a very reliable insurer for customers looking for coverage in low-risk or medium-risk industries. They have competitive pricing, specialized coverage endorsements, and will insure a broad range of industries. They’ve also been around a long time and are established and respected in the professional liability space.
The Bottom Line
Ready to find your perfect E&O policy? LandesBlosch can help you determine what you need and get quotes from the top insurers. Get started with an online quote today. We’ll work to understand your business and put together a solution that fits your budget and coverage needs.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.