Does Your Small Business Need Errors and Omissions Insurance?

Lucy Lazarony, Editor Forbes

​Errors and omissions (E&O) insurance comes to the rescue if you make mistakes in professional services while doing business.

This coverage is also known as professional liability insurance and it will help cover the cost of a client or customer who makes a claim against your business. Errors and omissions insurance assists with legal defense costs, judgments and settlements. Without errors and omissions insurance, you’d have to pay out of your own pocket if a customer says you owe them money because of a mistake.

If your business provides a professional service or offers advice to clients, you may be a good candidate for errors and omissions insurance.

What Does Errors and Omissions Insurance Cover?
 
Mistakes happen with every kind of business. In addition to actual errors and omissions in work, here are some mistakes that could prompt a customer to sue your business.

• Misrepresentation
• Violation of good faith and fair dealing
• Negligence
• False or inaccurate advice

 
If your business gets hit with an errors and omissions claim, you could be facing legal defense costs, including court costs and attorney fees, and paying any settlements or court judgments.
 
Depending on the claim, you could face disciplinary hearings from a regulatory or licensing board. As you defend yourself against an errors and omissions lawsuit, you could also incur a loss of earnings for your time spent in court and on depositions. Errors and omissions insurance helps pay for all these costs.

Types of Businesses That Need Professional Liability Insurance

There are certain states and licensing boards that require some businesses to have errors and omissions coverage. For example, more than 10 states require real estate agents to show proof of errors and omissions coverage before they receive their real estate licenses.
 
In addition to real estate agents, here is a roundup of the types of businesses that can benefit from professional liability insurance.

• Accountants
• Advertising agencies
• Graphic designers
• Interior decorators
• Management and business consultants
• Tax preparers
• Technology professionals
• Travel agents

How Much Does E&O Insurance Cost?

The cost of errors and omissions insurance is based on a number of factors such as:

• The size of the business and number of employees
• The revenue of the business
• The industry and the type of risks that you face
• Business location and state
• The past claims history of the business
• The E&O coverage limits that you choose

Here are more details about E&O insurance according to Insureon.

• The median cost of errors and omissions insurance is $59 per month
• 51% of small business owners pay between $500 and $1,000 per year for their E&O policies
• 18% of small business owners pay less than $500 per year for E&O coverage

What’s Not Included in Errors and Omissions Insurance?

Employment practices including wrongful termination or harassment are not covered under errors and omissions insurance. You will need an employment practices liability insurance policy to help with these costs.

Patents and trade secrets that you’ve taken without permission are also not covered by E&O if you’re sued. A general liability policy may offer some protection if you’ve stolen intellectual property.

Bodily injury or property damage caused by your business would not be covered by an errors and omissions policy. For these claims you would need a business liability insurance policy.

Work-related illnesses and injuries fall under workers compensation insurance.

Personally identifiable information that gets lost or stolen by your company is not part of errors and omissions coverage. A data breach insurance policy would help to cover these costs.
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How Does Technology Errors and Omissions Insurance Work?

If you work in the technology field, you may be able to purchase an errors and omissions policy specifically for your field of work. Technology errors and omission insurance can pay legal and other costs from claims made by customers.

Here are some instances where technology E&O insurance would be useful:

• If the software program you sold had glitches and ruined a client’s billing data
• If the equipment you installed malfunctioned and a customer was unable to receive orders
• If a website you created looks too similar to a competitor’s website
• If you miss important deadlines when developing a new technology product and this leads to a loss of profits
• If you sell the wrong product to a client that causes their system to crash

Types of technology professionals who could benefit from technology E&O insurance include:

• Businesses that produce electronic components for computers
• Computer consultants
• Internet service providers
• IT contractors
• Software developers
• Website developers

Technology E&O Insurance vs. Cyber Liability Insurance
 
A cyber liability insurance policy helps to protect a business from cyberattacks and data breaches. Let’s say some private customer information gets leaked from your company’s database. If the customer files a claim against your company, cyber liability insurance will help pay for the costs.
 
In contrast, technology errors and omissions insurance would cover instances of negligence and product failures as well as errors and omissions made by your technology company.
 
Technology E&O coverage kicks in when you have had a hand in what went wrong for a customer. With cyber liability insurance, your company is being attacked from an outsider through a data breach or cyberattack.