What is Errors and Omissions Insurance?
Errors and Omissions Insurance covers two very big risks:
- Financial loss of a third party arising from failure of the insured’s product to perform as intended or expected.
- Financial loss of a third party arising from an act, error, or omission committed in the course of the policy-holder’s performance of services for another.
Essentially, whenever you make a claim about your product or services performing a certain way and that claim is unfounded in a customer’s eyes, Errors and Omissions Insurance protects you from the subsequent lawsuit from that customer. Keep in mind that simply offering a product/service to a third party automatically creates expectations without anything more! An Errors and Omissions Insurance policy will generally cover any judgments against the company, settlements, and costs to defend against E&O-based lawsuits.
Why do I need it?
You may be extremely confident that product works or your services are performed with top-notch customer service, and your confidence may be completely warranted. But you still need Errors and Omissions Insurance. Here’s why:
- Nobody’s perfect! Regardless of how well your company does what it does, your company is run by humans. Humans make mistakes.
- Even if you are literally perfect, customer satisfaction is subjective! We all know the customer is always right, and some customers inevitably set the satisfaction bar way too high. Even if they bring a claim against your company that doesn’t stand a chance in court, you still have to pay lawyers to deal with it. E&O covers these costs.
You may be thinking, “wait…I just read the Founder Shield page on General Liability Insurance, and that said GL protects my company for product liability. What’s going on here?” While that’s true, GL doesn’t completely cover the company’s product liability. E&O acts to fill the gaps. A GL policy covers personal injury from your products, while E&O covers financial injury.
For example, if your company’s product causes physical damage to physical property (ex. destructive malware downloaded by a customer through your website fries the customer’s computer), the GL policy will respond to cover the loss of the computer. The E&O policy would not respond due to the “property damage” clause common to most E&O policies.
However, imagine that same customer came to your website and couldn’t log into your SaaS program that is used by the customer to onboard all of its new clients, causing the customer to miss out on a hefty amount of new business that week. GL would not respond in this situation (no physical injury), but E&O would respond to cover any claims brought by customers for their lost sales.
Can I have some more examples?
Here’s a product failure example:
- Your company sells parts that are used in a manufacturer’s products. The parts are supposed to perform a certain function, and if they don’t, the computer manufacturer’s product doesn’t work (either at all, or just not as well as it was supposed to work). Six months after the computer manufacturer’s products are in the market, your component parts stop working.
- The component parts don’t explode or otherwise break, so they don’t cause any physical damage to other parts of the manufacturer’s product (GL). They simply just stop working or working as intended, rendering the manufacturer’s product totally useless or less useful.
- The manufacturer now has to recall its products to replace the faulty component, and has claims against it brought by the purchasers of the product, and perhaps others as well— all who suffer financial loss because of the product failure. The computer manufacturer makes a claim against your company for all the damages at issue.
And here’s an error or omission example:
- Your company is hired to create a computer system or network for a customer, where the system or network is supposed to be able to perform certain functions, like process various transactions being called in from all around the country, or analyze data from sales information to draw certain conclusions on which the customer can act when implementing marketing strategies, strategic directions, etc. The list can go on and on.
- Once you finish putting the system or network in place, it turns out that it just doesn’t work. Your customer is now in a bad situation. It just paid for something that is useless and is paying for it (lost revenue, increased expenses, etc.) because it doesn’t have use of the system that it fully expected to have in place.
How do I protect my company and myself?
Want to read more on the subject? Check out our blog posts on Errors and Omissions Insurance.
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