Why do you need Errors & Omissions Insurance?

(Also known as Professional Liability Insurance)

You may be extremely confident that product works as advertised or that your services are performed with reliability and precision. Your confidence may be completely warranted. You probably still need errors & omissions insurance.

Errors & Omissions insurance covers two very big risks:

  1. Financial loss of a third party arising from failure of the insured’s product to perform as intended or expected.
  2. Financial loss of a third party arising from an act, error, or omission committed in the course of the policyholder’s performance of services for another.

Human Error

E&O---Human-Error

Nobody’s perfect! Regardless of how well your company performs its services, it’s still run by humans. Humans make mistakes.

Dissatisfied Customers

E&O---Customers

The customer is always right, yes, but we all know that some customers inevitably set the bar way too high. Some may be suffering financially and looking for any route that will help them rescue their balance sheet. Even if they bring a claim against your company that doesn’t stand a chance in court, you’ll still have to pay lawyers to deal with it.

Risk Management

Protection

No matter how meticulous you manage your books, vet clients, monitor your teams work or evaluate your contracts, some things are out of your control. E&O insurance protects your business when you or an employee are accused of making a mistake

If your company performs a professional service for another party — be it consulting, marketing, hosting, developing, processing, advising, managing, auditing, reporting, administering or any number of other business-y verbs — you run the risk that the other party will claim they suffered a financial loss as a result of a failure in your service.

What is Errors & Omissions Insurance?

Errors & omissions insurance, or “E&O,” is a type of professional liability insurance. Included within the professional liability category of business insurance are miscellaneous professional liability, technology E&O, and medical or legal malpractice policies. Technology E&O and cyber liability coverages are often packaged together since the two types of claims tend to intertwine.

Essentially, if you make a claim that your product or service will perform in a way that would be expected based on industry standards and your customer decides that claim was unfounded, errors & omissions insurance would step in to protect you from the lawsuit. The policy does this by paying your defense costs as well as settlements and judgments against your company. It’s malpractice insurance.

You might be thinking that this is just like products liability coverage provided by GL insurance policies. In a way, you’re right! Both are insurance policies that protect you from liability to third parties that results from the use of your product. The difference is that E&O is focused on purely financial losses, not bodily injury or property damage as is the case with GL insurance. (The exceptions to this rule include medical malpractice insurance as well as E&O policies with “contingent bodily injury/property damage” coverage enhancements).

Depending on the line of business you’re in, other coverages may be built into your policy. For example, companies in the technology space often purchase policies that include protections from liability after data breaches, hacking attacks and even allegations of defamatory material in the company’s online content.

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What does E&O insurance cover?

You will have to consult your policy documents to confirm exactly what coverage your E&O insurance provides but here are a few scenarios that typically would and would not be covered. You can read more about what E&O insurance covers here.

Defense costs
E&O insurance will often help cover defense expenses that result from a claim made against you or your business by a customer or client who is unsatisfied with your services due to an error or mistake.
Disciplinary proceedings
Having E&O insurance can be helpful when faced with proceedings that are brought by a licensing, regulatory, or other government agency that accuse your business of professional misconduct.
Loss of earnings
Claims made by clients can lead to extensive income loss due to the amount spent at depositions and trials, E&O can help cover this loss of earnings.
Employee errors
E&O may cover claims that stem from errors made by employees, independent contractors, or temporary staff.
Claims and damages
If your case results in settlements of claims caused by services or advice provided to clients, E&O insurance may provide coverage.
Personal injury
While not always, some E&O policies may help cover the costs associated with personal injury claims. This may include claims of slander or libel

How much does E&O Insurance cost?

More often than not, the premium is a function of company revenue. Changes in revenue will often be the driving factor for increase or decreases in cost on renewal.

But how is premium initially determined? This depends entirely on the industry. Tech E&O policies may look at revenue in conjunction with monthly average users. Allied health/malpractice premiums will be guided by the number of covered care providers. A tour guide’s E&O policy may be rated on “hours”: hours per tour x number of customers per tour x number of tours per year.

It’s difficult to give an estimated premium as so many variables come in to play. Other factors also include:

  • Location
  • Claims history
  • Policy limits

How it Works

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Who needs E&O Insurance?

To illustrate, imagine a customer who can’t log into your client-onboarding SaaS platform for two days due to a bug in your tech. This inadvertent lockout causes the customer to miss out on a hefty amount of new business that week. Your GL policy would not respond in this situation since there hasn’t been any physical injury to the client’s property. Instead, E&O would respond to covered claims brought by customers for their lost sales.

The types of operations that need professional liability coverage to mitigate their risk are almost too many to count:

Venture Capital

VC's that offer investment management services to their limited partners

Media & Advertising

Advertisers that manage programmatic campaigns for their clients

SaaS Marketplace

Digital marketplaces connecting customers and vendors

Consultants

Consulting firms that offer cyber security auditing and guidance

Health

Medical device manufacturers that run clinical trials

Software Developers

Programmers who build custom API's made-to-order

Happy clients

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