Errors and omissions (E&O) insurance is designed to cover claims for mistakes, breach of duty, and negligent acts in order to protect contract-based professionals working for clients. Everyone from independent contractors to real estate brokers should have E&O coverage to guard against client claims of errors, negligence, or even bad advice. Unhappy clients can cause a lot of disruption to your business, so it’s important to understand why you need this kind of coverage.
In this article, you will learn what independent contractors and small business owners need to know to protect their businesses with E&O coverage and how to buy the right policy to meet your needs.
What Does E&O Stand For?
“E&O” stands for “errors and omissions.”
But what's the difference between an error and an omission? An error is a mistake someone makes that is either accidental or intentional (like when running an experiment or a test). An omission is something someone forgets to do, leaves out, or excludes — possibly by mistake, but possibly not.
What Is E&O Insurance?
E&O insurance, also known as professional liability insurance, is a type of liability insurance that’s specifically designed for those who provide professional services, typically contract-based work done for customers. This includes web developers, real estate brokers, interior designers, financial advisors, bookkeepers, and tax preparers, to name a few. It also doesn’t matter whether your business is a sole proprietorship, has one employee, or employs a large team — if a lawsuit could cripple you financially, you want to have E&O insurance.
E&O insurance provides coverage for claims caused by an error, omission, breach of duty, or negligent act committed while providing professional services. This coverage will pay for defense costs and damages, including settlement amounts, and litigation expenses when lawsuits are involved.
The costs and expenses of defending even a trivial claim can be substantial and often create a distraction from running a business or professional practice. Additionally, there might be the cost of settling such a claim or being subject to an adverse judgment. E&O insurance is intended to protect you from these distractions and potential costs and liabilities.
What Does Errors & Omissions Insurance Cover?
Claims from dissatisfied clients are an all-too-common event, and E&O insurance can help to minimize the stress and out-of-pocket expenditures that come with such claims.
Even if a claim is baseless, E&O insurance covers the cost of defending yourself against the allegation, as well as the settlement or damages that you may have to pay the claimant. Here is what is typically covered by E&O policies:
- Attorneys’ fees
- Arbitration costs
- Expert testimony fees
- Court costs
- Cost of attending trials
- Settlement and judgment costs
- Disciplinary proceeding expense or license protection if a licensing authority investigates you
- Wage loss or claim attendance expense for time spent assisting counsel with your defense
What Does E&O Insurance Not Cover?
There is no one line of insurance that covers every risk confronting a business. E&O insurance is no different: it covers some key professional liability risks, but it does not cover everything. For example, E&O insurance typically does not cover defense costs or liability for the following categories of claims:
- Advertising injury
- Discrimination
- Work-related injuries to employees
- The costs of responding to a data breach. (A cyber-insurance policy can be purchased as an add-on to an E&O policy.)
- Criminal activity and intentional wrongdoing
Is E&O Insurance a Claims-Made or Occurrence Policy?
Another important aspect of E&O insurance is that it’s most always written on a claims-made basis. That means that the insurance policy would cover claims made against you during the policy period.
But if your policy expires, and you are named in a claim, you will no longer be covered for that event.
To get continuous liability coverage, you must always renew or replace your claims-made policy. You can also purchase an extended reporting period before the policy expires to extend the period for your claims-made coverage.
How Do I Pick an E&O Insurance Company?
There is no one-size-fits-all approach to selecting an E&O insurance company. Not all insurers write coverage that is suitable for every line of business, and some insurers specialize in E&O insurance that is tailored to the needs of particular industries. It’s important to select an insurer that is familiar with the risks associated with your type of business.
In addition, price is certainly a consideration. But the criteria used for selecting an E&O insurer should never be limited solely to price. The terms of E&O insurance policies may vary from insurer to insurer, and small differences in policy terms can have a significant impact on coverage. Here are some factors that you should consider when choosing an E&O insurance company:
- Its financial health and stability
- Its capacity to respond to the changing needs of your business
- Its reputation for working on claims or for responsive customer experience in general
How Much E&O Insurance Do I Need?
There is no “right” answer to this question. The appropriate limits of E&O insurance depend on, among other things, a business’s specific liability exposure and the litigation environment in which it operates. This may mean that a real estate broker who has a single franchise does not need the same E&O limits as a global brokerage.
Determining the appropriate amount of E&O insurance requires an assessment of the professional firm’s potential liability exposure, expected claim frequency, and cost of insurance.
Finding the “right” amount of E&O insurance requires careful consideration, and for many businesses, it will be invaluable to work with a trusted advisor who is able to provide meaningful counsel about evaluating risk, comparing insurance policies, and choosing between a perfect solution and a practical solution.
What Are Examples of E&O Insurance Claims?
While consultants, independent contractors, and freelancers should protect themselves with E&O policies, it’s hard to imagine a time when you’d really need it. Here are six examples of specific professionals who rely on their E&O policies:
1. A Bookkeeper Miscalculates
A bookkeeper mixes up some numbers for their client. This causes the tax liability to change for one year over another, which means the customer has to pay an excess of $15,000 in taxes. Once the customer realizes it was the bookkeeper’s mistake, they file a claim. The bookkeeper needs to contact their E&O insurance provider.
2. A Home Appraiser Gets the Blame
An independent appraiser values a home for the current market price, clearing the home buyers for a larger figure than the home is worth. The bank approves a big loan, but after a few years, the homeowners end up defaulting on the payment. The bank then files suit against the home appraiser, who needs legal support from their E&O insurance provider.
3. A Mortgage Broker May Have Broken the Law
A mortgage broker with a small business has an interesting history of securing better interest rates for white clients. An upset customer accuses the broker of lending discrimination and files a claim. The mortgage broker’s E&O policy includes Fair Housing Act violations coverage, so the broker immediately leans on their E&O insurance provider.
4. A Marketing Professional Has a Misprint
A small marketing business gets word from their client that it released the wrong version of the client’s advertisement. In fact, it released a version promising customers full refunds if they were dissatisfied with the product. This idea had been suggested by the marketing firm in a mock-up but vetoed by the client and removed from the final copy. Unfortunately, the mock-up was released. The client is now after the marketing firm for the lost revenue. The firm’s owner immediately calls their E&O policy provider.
5. A Web Developer Causes a Crash
A freelance website developer makes an update to their client’s site that creates a bug on the checkout page. A few hours later, the company realizes the issue and spends the whole day working to resolve it. As a result, the company claims it has lost $50,000 in revenue and files a claim against the web developer. The web developer turns to their E&O policy for help.
6. An Insurance Agent Misses a Deadline
With numerous customers and numerous policy renewal dates, an insurance agent loses track of one client’s paperwork. That means that the client’s home insurance policy did not get renewed. When the client’s basement floods, they learn of the mistake when they go to file a claim. Now, they’re suing their insurance agent for the damage cost. The insurance agent turns to their E&O policy for financial support.
What Types of Businesses Require E&O Insurance?
The simple answer is that E&O insurance is valuable for any business that has clients and provides services requiring a particular level of skill or expertise. More specifically, some professions that require licensure or other certification — such as attorneys, insurance brokers, or accountants — may be required to purchase professional liability insurance as a condition of practicing.
Here is a list of the professions Berxi currently provides E&O coverage for:
- Consultants, including HR, risk management, PR, safety, and educational consultants
- Creatives and freelancers, such as graphic designers, social media specialists, and copywriters
- Financial planners
- Grant writers
- Home inspectors and appraisers
- Insurance professionals, including agents, brokers, claims adjusters, and appraisers
- Mortgage brokers
- Real estate brokerages
- Recruiters
- Tax preparers and bookkeepers
- Technology professionals
- Translators
- Web developers
Who Needs E&O Insurance?
Even if E&O insurance is not required by law, E&O insurance is frequently a contractual requirement for firms or independent contractors doing business with clients under a professional services agreement. While E&O insurance may not be required by contract or a requirement of practicing as a professional, E&O insurance can certainly be of significant financial value in covering claims alleging a breach of the standard of care for businesses as diverse as:
- Software designers
- Financial advisors
- Technology consultants
- Management and business consultants
- Advertising agencies
- Graphic designers
- Real estate agents
- Property managers
- Home inspectors
In short, if a person, business, or professional partnership provides services that require a particular standard of care or a level of skill or expertise to clients, it likely should have E&O insurance.
Think of it this way: If it would be a large financial burden to bear the cost of defending a lawsuit alleging a breach of duty brought by a dissatisfied client who suffered a financial loss because of your firm’s action or inaction, you should consider purchasing E&O insurance. E&O insurance has many benefits and should be a part of the risk-management planning for a broad range of contract-based workers, independent contractors, freelancers, and small businesses.
How Do I Get E&O Insurance?
Insurance that was once available only through insurance brokers can now, in some instances, be bought online directly from an insurer. But there is no single “right” way for you to purchase E&O insurance. What works for one business might be a mistake for your business.
To select an appropriate insurance policy, identify the risks facing your business, research which policies best respond to those risks, and, and compare pricing and coverage of these E&O policies.
For some people, getting the right amount of advice and assistance means going to an experienced and trusted broker. For others, finding a reputable insurance company with responsive professional advisors online or by phone works best for them.
Berxi sells E&O insurance directly to customers, saving you about 15%. We also have a customer service rating of 4.87 (out of 5). If you’re interested in buying direct, get a quote online or give us a call.
What Is the Difference Between D&O & E&O Insurance?
While there are many similarities between the terms and conditions of directors & officers/management liability insurance (“D&O insurance”) and errors & omissions insurance, there are stark and important differences in the substance of what will be covered by these policies. Here’s a breakdown of the concepts behind each of these coverages:
In its most basic form, D&O Insurance is intended to cover a business’s high-level decision makers (directors, officers, senior-level managers, etc.) for claims alleging that they were negligent in their duties to manage the business. People who might personally sue a director or officer include shareholders, board members, employees, vendors, customers, and competitors.
Coverage will differ depending on whether the company is publicly traded or privately owned. In either case, the driving factor in purchasing D&O insurance is what is known as securities claims, or claims made against an individual (or the company), alleging a violation of federal, state, or local laws governing the purchase or sale of securities. This includes stocks, bonds, partnership interests, and investment contracts.
But E&O insurance is intended to cover suits against a business by its customers or clients for negligence in the performance of professional services. Unlike D&O, E&O insurance is intended to protect the business first, with coverage flowing down to the individuals who perform the work on the entity’s behalf.
Does General Liability Cover E&O?
General liability insurance provides coverage for claims brought by third parties against an insured for bodily injury, property damage, or personal and advertising injury (e.g., wrongful eviction, libel, and slander). General liability insurance policies also contain exclusions for purely financial injury and for claims concerning the rendering of professional services, so general liability policies are not designed to cover the same exposures as E&O.
On the other hand, E&O insurance provides coverage for claims alleging that an insured made an error or mistake while providing professional services that resulted in economic loss to the claimant. E&O policies do not cover bodily injury, property damage, or personal and advertising injuries.
Thus, businesses and professionals typically purchase both general liability and E&O insurance.
How Much Does Errors & Omissions Insurance Cost?
It’s difficult to calculate an average cost for errors and omissions insurance because it provides coverage for so many different kinds of professionals with various backgrounds, facing a wide variety of risk. Below, we will highlight annual pricing of a Berxi E&O policy for specific professions. But it’s also helpful to identify some of the factors that are taken into consideration in determining the cost of E&O insurance. These factors include:
- Exposure to risk. Businesses with greater liability exposure will have higher premiums than similarly sized businesses in low-risk industries. Similarly, E&O insurance costs will be higher for businesses that are sued frequently than for businesses that are not routinely the target of lawsuits.
- Claims history. Insurance costs will often be higher for someone who has been sued multiple times, lost lawsuits, or has a history of policy cancellations.
- Business practices. Underwriters also look at the practices of a prospective insured. A prospective insured with rigorous internal risk controls will be viewed more favorably by underwriters than a prospective insured with loose controls.
- Scope of coverage. It should not be a surprise that insurance companies will charge more for an insurance policy with a low deductible, high limits, and the broadest possible terms than for an insurance policy with a high deductible, lower limits, and standard coverage terms.
How Can I Save Money on My E&O Insurance?
When it comes to saving money on your policy, you’ll want to ask yourself a few questions to make sure you are being both smart and economical when choosing your insurance protection.
With the goal of buying top-rated coverage from a financially stable and highly rated insurer — without overpaying, here are some things to make sure of:
1. Are you buying directly from the insurer?
Buying direct may help you get the lowest price for your insurance. Even if you love and trust your insurance broker, you could be spending up to 20% extra in brokerage commissions and fees. And these get paid year after year, so they add up! A company like Berxi allows you to buy directly from the insurance provider, cutting costs along the way. Another benefit of buying direct is that you build a relationship with the insurance company from the start. After all, this is the team you’ll most likely work with if you have a claim.
2. Do you have the right limits of liability?
Some professionals many not need $1 million in annual limits of liability. Consider your line of work and the exposure of the clients you work with so you’re not paying for more coverage than you need. If the risk is low, check to see whether your provider offers varied limits of liability. Berxi policies provide limits ranging from $100,000 per claim / $250,000 per year to $1 million per claim / $2 million per year.
3. What is the risk exposure of your client base?
Considering it’s your clients who would file a claim against you, you want to analyze the risk and potential loss attached to your customer base. If you’re a tax preparer for clients who make millions of dollars, it would make sense to protect yourself with higher limits that would protect your own financials if your mistake costs a customer a lot of money.
But if you have a smaller client base with lower net worth, you can potentially lower your limits of liability.
4. Are you implementing excellent risk management policies?
Even if you are very careful in your business, you can be wrongly named in a claim or a lawsuit. There are, however, still ways you can lower your risk of such a claim.
This includes training your staff in risk prevention, signing contracts with customers to protect your liability, communicating properly with customers, documenting all interactions with customers, and creating excellent files.
Another useful exercise is to compare providers' policies side by side. For instance, you can look at this E&O Comparison Chart to see the breadth of coverage Berxi provides compared to other insurance providers.
What Is the Average Cost of E&O Insurance by Industry?
Below are some examples of annual pricing for certain professionals. Keep in mind that policy pricing does differ based on a business’s location, number of employees, reach, experience, limits of liability, and many other factors. The following examples are Berxi E&O insurance prices for a range of professionals. You’ll see two payment options based on the limits of liability offered. *
|
Professional |
Low Limits $100K/$250K |
High Limits $1M/$2M |
|
Business Management Consulting |
$724.38 |
$1,368.78 |
|
Financial Planner |
$513.10 |
$969.55 |
|
Graphic Designer |
$422.56 |
$798.45 |
|
Human Resources Consultant |
$301.83 |
$570.32 |
|
Marketing Consultant |
$603.65 |
$1,140.65 |
|
Photographer |
$241.46 |
$456.26 |
|
Professional Organizer |
$241.46 |
$456.26 |
|
Tax Preparer |
$301.83 |
$570.32 |
|
Translator |
$241.46 |
$456.26 |
*Rates via Berxi as of March 2024, based on professionals living in Texas, making $50,000 a year, choosing a $1,000 deductible.
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How Do Policy Limits Affect E&O Insurance Costs?
As you can see in the chart above, the higher the limits of liability you purchase, the more expensive your annual policy premium will be.
A customer’s options for limits are broken up into two numbers. The first, typically the lower number, refers to the amount of money available per claim. The second, typically the higher number, is the amount of money a customer has available for all of their claims over each policy year (this is typically referred to as the “aggregate limit”).
In the examples above, the lower limits of $100,000/$250,000 indicate that the customer has $100,000 available per claim and $250,000 for the year. Thus, if the insurance company pays $25,000 to settle one claim, the customer would have $225,000 remaining to cover claims during the rest of the year.
These low-limit policies cost less than the policies offering $1 million per claim and $2 million per year because they’re not providing as much money to the customer. They are best suited for industries that aren’t high-risk and don’t serve high-net-worth clients or businesses.
Can You Run a Business Without Insurance?
As mentioned earlier, for some professional businesses, E&O insurance is legally required. But even when this is not the case, running a business without insurance could leave the business owners and employees at significant risk of financial ruin.
The cost of defending claims is easily in the five digits, even if the business is not found liable for any damages. There is also the cost of valuable time and effort to respond to court pleadings, depositions, negotiations, or even trials. These costs can dramatically impact business operations, and for many business owners, it’s not worth the risk of having to deal with lawsuits without a safety net.
How Do I Avoid E&O Claims?
The best way to avoid E&O claims is to faithfully and consistently use best practices to your particular profession or business. No amount of insurance can avoid E&O claims. But insurance does help to reduce the cost and impact E&O claims have on you and your business.
Some helpful practices to avoid E&O claims include:
- Keeping up with developments and current teaching in your profession by participating in professional associations and taking continuing education courses
- Maintaining an active practice within your area of expertise
- Maintaining a manageable workload
- Hiring capable and trustworthy employees
- Providing proper supervision to employees and contractors
- Practicing strict quality control
E&O insurance can save you from financial trouble. Not only will it save money out-of-pocket, but knowing it’s there will give you the peace of mind to provide your clients a superior experience.
Check out our page on E&O insurance for more details and a customized quote.
Image courtesy of iStock.com/skynesher