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Errors and Omissions Insurance
Errors and omissions insurance, also known as E&O or professional liability, covers companies in third-party or client lawsuits claiming inadequate work or service. Individuals in the professional services industry lean on this coverage heavily, such as real estate agents, attorneys, and medical professionals, to name a few. And for good reasons: human errors or oversights, missed deadlines, budget overruns, incorrect advice, etc., often result in costly cases — but E&O insurance responds to these mishaps.
What Is Errors & Omissions Insurance?
Known primarily as errors and omissions (E&O) or professional liability, this coverage has also been dubbed “malpractice” insurance. Here’s why: E&O and general liability insurance protect companies from third-party liability allegations. While both coverages safeguard the organization against mishaps and mistakes, the two focus on different aspects of protection.
For example, an errors and omissions policy focuses solely on financial loss instead of bodily injury or property damage, as general liability insurance does. Furthermore, E&O covers third-party financial loss arising from two factors: 1.) the insured’s product or service’s substandard performance and 2.) an insured’s act, error, or omission during the performance of client services.
Consider a customer unable to log into your client-onboarding SaaS platform for a few days due to a bug in your technology. The lockout causes your customer to miss out on new business opportunities for that week. E&O insurance would respond to this particular claim, whereas general liability wouldn’t since there was no physical injury or property damage.
Errors & Omissions Coverage
Understandably, errors and omissions insurance benefits many industries, but especially those in the professional services space. Liability claims bombard this industry with hefty legal and court costs. E&O insurance provides an added layer of financial protection.
Who Needs Errors & Omissions Insurance Coverage?
Companies that perform professional services for another party — consulting, marketing, hosting, developing, processing, advising, managing, auditing, reporting, and administering, to name a few — run the risk that the other party will claim they suffered financial loss due to a failure in your service.
The types of operations that need professional liability coverage to mitigate their risk are almost too many to count:
Venture Capital
VC firms that offer investment management services to their limited partners
Consultants
Consulting firms that offer cyber security auditing and guidance
Media & Advertising
Advertisers that manage programmatic campaigns for their clients
SaaS Marketplaces
Digital marketplaces connecting customers and vendors
Software Developers
Programmers who build custom API’s made-to-order
What Does Errors and Omissions Insurance Cover?
You will have to consult your policy documents to confirm exactly what coverage your cyber insurance provides but here are a few scenarios that typically would and would not be covered. You can read more about what cyber insurance covers here.
Defense Costs
Errors and omissions insurance will often help cover court costs and legal fees resulting from a claim made against you or your business by a customer or client unsatisfied with your services due to an error or mistake.
Disciplinary Proceedings
Having errors and omissions insurance can be helpful when faced with proceedings brought by a licensing, regulatory, or other government agency that accuses your business of professional misconduct.
Loss of Earnings
Clients’ allegations can lead to extensive income loss due to the amount spent at depositions and trials; errors and omissions insurance can help cover this loss of earnings.
Employee Errors
Errors and omissions insurance may cover claims 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, errors and omissions insurance may provide coverage.
Personal Injury
While not always, some errors and omissions policies may help cover the costs associated with personal injury claims, including slander or libel claims.
Errors and Omissions Insurance Policy
Errors and omissions insurance covers:
How Can I Manage My E&O Policy and Risks?
Before discussing managing this particular policy, let’s explore its foundation more in-depth. Errors & omissions insurance 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.
Understanding that other insurance policies often work hand-in-hand with errors and omissions is critical. For example, technology E&O and cyber liability coverages are often packaged together since the two types of claims tend to intertwine. Review these coverage options with a trusted commercial insurance broker to ensure all exposures are covered.
If you 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 will step in to protect you from the lawsuit. The policy does this by paying your defense costs, settlements, and judgments against your company; it’s malpractice insurance.
What Does an Errors and Omissions Policy Not Cover?
Similar to many other insurance policies, errors and omissions insurance coverage has exclusions. For example, E&O insurance doesn’t cover the following claims:
Remember, products liability coverage and general liability insurance policies protect companies from liability to third parties that result from using your product. However, E&O focuses purely on financial losses, not bodily injury or property damage, as with general liability insurance. (The exceptions to this rule include medical malpractice insurance and E&O policies with “contingent bodily injury/property damage” coverage enhancements).
Errors and Omissions Insurance Cost
As with most commercial insurance policies, the cost of E&O insurance depends on several factors: location, claims history, and policy limits, to name a few. However, the following are some other main points insurance carriers will consider when calculating a premium.
Errors and Omissions Insurance Cost Factors
More often than not, the premium is a function of company revenue. Changes in revenue will often be the driving factor for increases or decreases in renewal costs.
How carriers determine premiums depends entirely on the industry, for example:
- Tech E&O policies may look at revenue in conjunction with monthly average users.
- The number of covered care providers will guide allied health/malpractice premiums.
- 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.
Additionally, many major commercial insurers will customize an errors and omissions policy, which impacts the premium. That said, some of the most prominent enhancements include:
- Various defense cost reimbursement
- Contingent bodily injury/property damage
- Record retention
- Zero dollar deductible
- Deposition expense reimbursement
- Various expanded limits
Errors & Omissions Insurance Claim Examples
An e-commerce platform, SellYouLater, contracted with a third-party service provider. A burglar stole two laptops from the service provider containing the data of over 800,000 clients of the SellYouLater. Under applicable notification laws, SellYouLater – not the service provider – was required to notify affected individuals. Total expenses incurred for notification and crisis management to customers was nearly $5,000,000.
A US-based information technology company, ‘Merica, contracted with an overseas software vendor, Internacional. Internacional left universal “administrator” defaults installed on ‘Merica’s server, and a “Hacker for Hire” was paid $20,000 to exploit the vulnerability. The hacker advised if the requested payment was not made he would post the records of millions of registered users on a blog available for all to see. The extortion expenses and extortion monies are expected to exceed $2,000,000.
An intern released a computer worm directing infected computers to launch a denial of service attack against a regional computer consulting & application outsourcing firm. The infection caused an 18-hour shutdown of the entity’s computer systems. The computer consulting & application outsourcing firm incurred extensive costs and expenses to repair and restore their system and business interruption expenses, totaling approximately $875,000.
A SaaS platform, SaaSyAttitude, stored credit and debit card account numbers, names, addresses, and telephone numbers that were stolen. In total, over 365,000 customers’ records were exposed. The organization settled with the state attorney general and is now compelled to provide free credit monitoring, credit restoration to customers that were victims of identity fraud, and reimbursement to customers for direct losses that resulted from the data breach. The organization must revamp its security policies, implement technical safeguards, and conduct random compliance audits.
An e-commerce platform, SellYouLater, contracted with a third-party service provider. A burglar stole two laptops from the service provider containing the data of over 800,000 clients of the SellYouLater. Under applicable notification laws, SellYouLater – not the service provider – was required to notify affected individuals. Total expenses incurred for notification and crisis management to customers was nearly $5,000,000.
A US-based information technology company, ‘Merica, contracted with an overseas software vendor, Internacional. Internacional left universal “administrator” defaults installed on ‘Merica’s server, and a “Hacker for Hire” was paid $20,000 to exploit the vulnerability. The hacker advised if the requested payment was not made he would post the records of millions of registered users on a blog available for all to see. The extortion expenses and extortion monies are expected to exceed $2,000,000.
An intern released a computer worm directing infected computers to launch a denial of service attack against a regional computer consulting & application outsourcing firm. The infection caused an 18-hour shutdown of the entity’s computer systems. The computer consulting & application outsourcing firm incurred extensive costs and expenses to repair and restore their system and business interruption expenses, totaling approximately $875,000.
A SaaS platform, SaaSyAttitude, stored credit and debit card account numbers, names, addresses, and telephone numbers that were stolen. In total, over 365,000 customers’ records were exposed. The organization settled with the state attorney general and is now compelled to provide free credit monitoring, credit restoration to customers that were victims of identity fraud, and reimbursement to customers for direct losses that resulted from the data breach. The organization must revamp its security policies, implement technical safeguards, and conduct random compliance audits.
Insurance Brokers For Errors and Omissions Insurance
Founder Shield is a data-driven insurance brokerage serving high-growth, innovative industries. We have a passion for creating and developing innovative risk management products across emerging industries and work hand in hand with clients and underwriters to ensure transparency, efficiency, and reliability every step of the way. Our team has specialized expertise and experience in providing E&O insurance services.
We partner with the leading professional liability insurance carriers to craft tailored risk management programs for public companies and venture-backed companies preparing for funding rounds. With errors and omissions insurance a major budget item, we understand that companies look for new and creative solutions to help manage increasing costs while also securing best-in-class coverage.
Justin is the market-facing leader at Founder Shield, with eight years invested in the boutique broker and more than a decade in the insurance industry.
