Like many small businesses, your company might provide consulting, design, financial, or other professional services to customers or clients. However, nobody’s perfect, and your business can make mistakes that can cause a client to lose money. They, in turn, might seek restitution by filing a claim against your business. You can safeguard your business from claims arising out of professional mistakes by purchasing errors and omissions (E&O) insurance.
E&O insurance is a specialized type of liability coverage. If you don’t currently have it, your company could be facing a serious financial risk. This type of insurance is readily available and may cost less than you might think. Learn how it can help protect your investment in your firm.
- Errors and omissions (E&O) insurance protects your business from third-party claims for negligence, errors, or omissions it allegedly made while providing a professional service.
- Some E&O policies are industry-specific, while others cover risks faced by businesses in many industries.
- The cost of an E&O policy varies, but most small businesses pay an annual premium between $500 and $1,000.
- You can take steps to reduce your cost of E&O insurance, such as increasing your deductibles and shopping for discounts.
What Is Errors and Omissions (E&O) Insurance?
Errors and omissions (E&O) insurance covers claims against a business that arise from negligence, errors, omissions, or mistakes it allegedly made while providing advice or a service. Also known as professional liability insurance, E&O insurance pays for damages or settlements paid to claimants as well as the cost of defending your business against lawsuits.
E&O policies may cover defense costs within the policy limit or (preferably) in addition to the limit.
How E&O Insurance Works
Businesses need E&O insurance if they give advice or provide a professional service that requires specialized knowledge or training. For some professionals, E&O coverage may be mandated by state law.
- Business consultants
- Technology firms
- Home inspectors
- Real estate agents
E&O policies are classified as either claims-made or occurrence, though most are the former. Both types cover claims made against a business arising from incidents that took place during the E&O policy period. Where they differ, however, is that claims-made E&O policies must be filed before the policy has expired. Occurrence policies may be filed during or after the policy period.
Because claims-made policies don’t cover claims filed after the policies have expired, they are typically cheaper than occurrence policies.
Types of E&O Insurance
There are many types of E&O policies, and some are designed for specific types of businesses. For instance, architects’ and engineers’ E&O policies are designed for architectural and engineering firms and related businesses, such as land surveyors and construction managers. Similarly, real estate agents’ E&O insurance is designed for real estate sales agents, brokers, and appraisers.
When an industry-specific policy isn’t available, insurers may use a miscellaneous E&O form, a generic policy that can be adapted to a wide assortment of small businesses and sole proprietors.
Other E&O policies focus on a specific type of risk that affects a broad range of businesses. Cyber liability insurance, for example, is purchased by businesses of all sizes across many different industries. It covers first-party and third-party losses that arise from issues such as:
- Data breaches
- Ransomware attacks and other security failures
Another example is directors and officers (D&O) liability insurance, which protects corporate directors and officers against claims alleging breach of fiduciary duty, misuse of company funds, fraud, and other improper acts. Many types of businesses purchase D&O coverage, including public, private, and nonprofit companies.
Average E&O Insurance Costs
Most small businesses pay an annual premium between $500 and $1,000 for E&O insurance. The amount a company pays depends on various factors, including:
- Industry: Businesses in riskier industries pay more than those in industries that have fewer risks.
- Company size and revenue: Generally, the larger the business and the more revenue it generates, the more it will pay for E&O insurance.
- Coverage and limits: Businesses pay more for broader coverage and higher limits.
- Loss history: Businesses that have had E&O claims in the past will likely pay more than those with no previous losses.
- Location: Rates vary by state. Also, when E&O insurance is mandated by state law, the minimum required limit may be higher in some states than in others.
How To Save on E&O Insurance
The cost of E&O insurance varies from one insurer to another, so it pays to shop around. You can obtain quotes online or ask your insurance agent or broker to solicit quotes for you. Here are some other tips to help reduce your cost of E&O insurance:
- Implement quality control measures at the workplace to reduce errors: Fewer errors mean fewer claims.
- Protect sensitive information: Avoid claims by reducing the chance of an accidental release or hacking event.
- Implement clear communication practices with clients: This can help prevent miscommunications or misunderstandings that can lead to claims.
- Increase policy deductibles: Just like in other types of insurance, paying a higher E&O deductible can lead to lower premiums, which can be helpful if you're concerned about more expensive claims.
- Look for discounts: Some insurers provide a discount if you or your employees have completed professional certifications or designations.
- Look for or free add-ons: Insurers may offer additional coverages, such as cyber liability, for little or no additional premium.
Frequently Asked Questions (FAQs)
Who needs E&O insurance?
Any business that provides advice or sells a professional service should consider buying E&O insurance. Designers, consultants, and financial advisers might consider buying a policy. In some states, E&O insurance is mandatory for certain professionals.
Where do you get E&O insurance?
E&O insurance is available from many large insurers, such as Hartford, Nationwide, and Progressive. It’s also available from specialty carriers like the Doctors Company, which sells medical malpractice insurance.