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:
- 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 policyholder’s performance of services for another.
Nobody’s perfect! Regardless of how well your company performs its services, it’s still run by humans. Humans make mistakes.
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.
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.
Who needs Errors & Omissions 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:
✓ Outsourced CFO’s that vouch for a company’s books and offer tax advice.
✓ Advertisers that manage programmatic campaigns for their clients.
✓ Digital marketplaces connecting customers and vendors.
✓ VC’s that offer investment management services to their limited partners.
✓ Consulting firms that offer cyber security auditing and guidance.
✓ Medical device manufacturers that run clinical trials.
✓ Programmers who build custom API’s made-to-order.
The list goes on… All of these companies need the right E&O policy in place to protect them if a customer relationship breaks down and legal action starts. (We’ve recovered for claims related to all of those services by the way).
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:
- Claims history
- Policy limits
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