Errors and Omissions (E&O) Insurance

We all make mistakes. But in business, a mistake can be expensive.

If a third party sues you for professional negligence, poor service, or an omission, you could face a lawsuit.

Errors and omissions insurance is a low-cost way to protect your company from professional liability if you or an employee makes an error while providing professional advice or service.

What is Errors and Omissions (E&O) insurance?

Errors and omissions insurance (also called E&O insurance) protects you from compensation claims if a client sues your service business for errors, omissions, or negligent acts. 

Mistakes, whether real or perceived, are unavoidable. However, a significant financial fallout from a successful claim for an error, negligent act, or omission is avoidable. Errors and omissions insurance protects the insured against customer and client claims and is essential for anyone who provides professional services or advice.

Also known as professional liability insurance, errors and omissions insurance is a common form of business insurance. Your plan will pay for legal expenses, up to the policy limits, if someone takes you to court because of a mistake made while providing a professional service. 

For instance, a client may take legal action if you make a mistake in your work, provide ineffective business advice, or deliver a project late. An error and omissions plan protects you against this type of lawsuit by paying for legal costs. 

What does E&O cover?

E&O insurance protects your business against a wide range of compensation claims made by prospect, customers or other third parties. Generally, the coverage covers allegations against you, your business, and your employees.

In most cases, E&O insurance provides protection against: 

• Professional negligence: A client may decide to take you to court if you or any of your employees fail to fulfill their professional obligations or are unable to perform their professional duties to a required standard. If you have E&O coverage, it will cover legal damage costs for this type of lawsuit. 

• Undelivered services or missed deadlines: A missed deadline or unfinished work can impact a client’s bottom line. If they successfully sue you for it, errors and omissions insurance can help cover the legal damage costs. 

• Unintentional data leak or breach of copyright: Your business may find itself in the line of fire in the event of an unintentional leak of sensitive data or breach of copyright. For example, an employee may send an email containing confidential information to the wrong recipient or use an image found on the web. Such actions can result in legal action against your business.

• Defamation and libel: A client can seek compensation if you or any of your employees make any false or incorrect statements about them. 

• Loss of data: A client can sue you in the event of an accidental deletion of files or loss of data due to system breakdown.

If a client initiates a case against you for any of these reasons and wins, you will likely have to pay the compensation amount, settlement fees, and some of the claimant’s legal fees. All these costs can easily add up to a few millions (if not more). Fortunately, your error and omission insurance will cover both court costs and any settlements, up to your policy’s limits. 

Most E&O insurance plans cover: 

• legal fees 
• court fees
• defendant’s legal fees (in the event of a successful claim
• settlement fees and compensation payouts

What is not covered by E&O Insurance?

Typically, errors and omissions insurance excludes the following: 

• Property damage or bodily injury: Any bodily injury or property damage caused by your business is excluded from your E&O Insurance policy. If you want protection against these types of lawsuits, buy a business liability insurance plan. 

• Employment practices: Your E&O coverage will not protect you against claims made by employees alleging wrongful termination, discrimination, or harassment. To cover defense costs and losses from successful employment-related claims, you need employment practice liability insurance. 

• Personally identifiable information: If your company loses personally identifiable information—any information that can trace or identify an individual directly (like name, address, phone number, etc.) or indirectly (like gender, birth date, race, etc.) — you cannot count on your E&O policy to come to your aid. For such situations, you need data breach insurance. 

• Work-related injuries and illness: E&O coverage does not extend to occupational diseases and work-related injuries. For protection here, you need workers compensation insurance. 

Who needs E&O Insurance?

Any business that provides a service or offers advice in return for a fee needs error and omission insurance. With these types of businesses, a mistake or omission might trigger a client to take legal action. Some professionals that take out this type of insurance coverage include: 

• Consultants
• Accountants
• Real estate agents
• Insurance brokers (Dundas Life has E&O insurance for our brokers!)
• Graphic designers or artists
• Bookkeepers
• Technology professionals
• Interior decorators
• Advertising agents
• Marketing consultants
• IT consultants
• Recruitment professionals
• Surveyors
• Architects

How much does E&O Insurance cost?

How much you will pay for E&O Insurance coverage depends on many factors.

• Industry type: Generally, higher-risk industries are those that deal with large amounts of sensitive information. Examples include businesses offering financial, medical, or legal advice.  If you belong to a high-risk industry, expect to receive higher premiums. 
• Business size: Small businesses generally have fewer workers and lower risk. Consequently, E&O insurance tends to be cheaper for them compared to large businesses. 
• The coverage amount: The greater your coverage needs, the more you will pay for protection. 
• Deductible: In insurance parlance, a deductible is the amount of money you must pay out-of-pocket in the event of a covered loss before the insurer starts paying. The lower the deductible, the higher the insurance cost, all other things being equal. 

Why is E&O Insurance important?

Mistakes happen. However, certain types of errors can be more expensive than others. If you provide professional advice or services to your clients and poor advice, omissions, or mistakes can financially harm your clients, you need errors and omission insurance.

E&O insurance provides peace of mind that you will not have to cover all of the legal damage costs yourself if a third-party successfully sues you for a mistake, omission, or poor service. Your plan will pay the defendant’s legal costs and compensation amount, up to your policy limits. 

Do freelancers need E&O Insurance?

If you provide professional services or advice to clients, you likely need errors and omissions insurance, regardless of whether you are a freelancer or a business owner. Protecting yourself with insurance makes sense as settlement fees and legal costs can be devastating for freelancers and small businesses.

What is the difference between errors and omissions insurance and general liability insurance? 

While both offer protection against liabilities, they cover different types of lawsuits. A general liability insurance plan typically has a broader focus than errors and omissions insurance and comes into play if you are sued for: 

• A non-employee bodily injury that happened on your building premises
• Damage caused to another person’s or business’ property while performing work-related tasks
• Advertising injuries (examples include copyright infringement, libel, misappropriation, and slander)

Errors and omissions insurance also provide financial protection in the event of third-party lawsuits, but it only covers lawsuits over: 

• Errors or omissions
• Failure to meet the obligations of your business contract
• Failure to perform your duties to a required standard
• Negligent service

How do I buy E&O Insurance? 

If you have a fair idea about how much coverage you need, it's possible to purchase E&O Insurance online. But make sure you get quotes from multiple providers as that will allow you to get the best possible value for your buck. 

If you are not sure about your coverage needs or require a highly-customizable policy, consider working with an independent broker.

Conclusion 

Errors and omissions insurance is a common form of business insurance that can come to your aid if a third party takes legal action against you due to an alleged negligence. If you lose the lawsuit, it pays legal fees, defendant’s legal expenses, and compensation fees, up to pre-defined limits. 

It's particularly important for any professional, including freelancers, who make a living from their expertise. Dundas Life works with top insurance carriers in Canada and can help you find the right coverage at the lowest-possible rate.