Public Liability insurance policy, indemnifies the insured for death, loss, or damage to property of others (Third Parties) as a result of the business activities of the insured. However, what will the case be when a company or professional while rendering their services make some mistakes that affected their client’s business or services rendered to them? Or what happens when a dentist forgets to sterilize his utensils and used them for another that caused infection for the patient and the patient decides to sue the dentist?
Examples of such scenarios abound, however, the solution to anyone or business in such a situation is to either settle the issue out of pocket to the tune of what the court decides (which can roll into millions) or buy Errors and Omissions (E & O) Policy to cater for any of such occurrence in future. An E & O policy offers protection to the company, professional, or dentist in our example from lawsuits arising from their negligence, errors, or omission that occurs while carrying on their businesses which cause others loss.
What Is Errors and Omissions Insurance (E&O)?
Errors and Omissions Insurance happen to be a form of professional indemnity or liability cover that protects or indemnifies professionals, workers, and/or companies against professional negligence or bad workmanship. E & O insurance policy comes to the rescue of an insured when claimed against due to errors or omissions committed by the insured or the insured’s staff while carrying on their business service that led to a financial loss of their client. These covers are available to companies, individual workers, professionals (like lawyers, doctors, investment advisers, insurance brokers/agents, accountants, etc.), and people rendering services.
Understanding Errors and Omissions Insurance(E&O)
Errors and omissions insurance fall into the category of liability insurances and its purpose is to cover the insured against the full costs of a claim (i.e., legal action) taken against them. For example, if an investment banker advised a client to take up certain investments. However, if the investment banker made some errors or omitted to disclose certain information to his client and the client suffers a financial loss as a result of the investment. If he decides to sue the investment banker, the banker’s Errors and Omissions Insurance policy will come to his rescue.
During the court proceedings, the policy covers both legal costs and settlements (awarded against the insured) up to the limits stated in the insurance contract. Importantly, you need to know that this type of insurance is required by individuals and companies giving advice to or offering some form of service to others/businesses. This policy like every liability policy will help many professionals or companies stay in business.
Lawsuits can be costly and can roll into millions of dollars in damages quickly beside the legal fees. Hence, E & O insurance can help mitigate the potential liabilities. Note that even if a case was thrown out by the court or the insured was found not guilty, the legal fees and other related costs will still be covered by the policy. This cost can be quite high and goes deep into the company’s overhead without an E & O policy.
Financial regulatory bodies like the Financial Industry Regulatory Authority (FINRA) or company investors usually require Errors and Omissions insurance policy from financial professionals like Insurance brokers/dealers, investment advisers, financial planners, etc. This is a way of helping them stay in business in case of claims from clients.
Furthermore, Errors and Omissions insurance is also useful outside the financial industry. People and companies in engineering, general maintenance, and contractors, non-profits organizations, event planners, printers, and professionals like doctors, dentists, etc. all require the policy.
Importantly, an E & O insurance can cover losses that have occurred years back even before the policy came in force. In that kind of situation, the first time the mistake comes to the client will be when the insured gets sued, fortunately, the policy will still respond. However, this is only possible when the insurer while drafting the policy has the retroactive date set on it.
The date can be as far back as possible depending on the agreement during the processing of the contract. The more backward the retroactive date goes the more exposure, the more coverage, and the higher the premium payable.
Who Is Covered Under the E & O Insurance?
- The CEO/business owner
- The Company’s employees (full time or part-time and salaried or hourly)
- The company’s subcontractors working on behalf of the company
What Is Covered Under An E & O Insurance?
Depending on how elaborate your E & O insurance is, it usually covers the following up to specified policy limit:
- Judgments – The court’s decision or that of the judge is covered by the policy
- Legal fees – Whatever the fees your legal team charges for defending you or your business in court are covered
- Court costs – As the court case continues, all the court costs associated with defending you or your business in court is covered
- Settlements – In some cases, you might decide to settle a plaintiff’s claims out of court and when that happens, you are still covered.
Do note that all the fees and costs mentioned above are covered subject to the policy limits.
What Type of E and O Insurance Is Available?
An Errors and Omissions insurance policy is not straight-jacketed. It’s a policy that can be customized to meet the specific needs of a business or industry. For instance, a dentist is exposed to different risks compared to an event planner. Now, when compared to a Medical Doctor, the dentist’s risk is even lower.
From the cases, the three individuals need E & O policies but with different coverage. The insured can take their unique exposures and use them to package different E & O policies for them. Hence, E & O policies are packaged to reflect the inherent risks and common exposures particular to the different businesses.
What E and O Insurance Does Not Cover?
E & O insurance has some restrictions as to the extent of cover. Temporary employees, ongoing claims before the policy was taken up or claims in different jurisdictions may or may not be covered. For them to be covered there must be a special arrangement with the insurer during the contract preparation. E & O policy will not respond in criminal prosecution and some liabilities arising in civil court that are not mentioned in the policy.
Errors and Omissions Insurance Case Study
Let’s say a company A that is into auditing of accounts of companies carries out audit exercise in another company B. If it so happened that after the auditing exercise, the auditor reported that everything is fine with the company. Now based on the report given by the audit firm, some investors invested in the said company and after investing they began to discover some anomalies in the accounts. The anomalies then gave the true position of the company that it is not as highly rated as the auditors rated it.
As a result of that, investors then began pulling out their investments and made the company run into losses. The said company can sue the audit firm for any amount for its negligence. When that happens, the audit firm can call on their E & O Insurance policy to find out if the claim is covered. If they have an elaborate cover, the insurance can be called upon to pay for the legal expenses and/or monetary damages awarded against them. In another case, if the investors sue them for loss of investment as a result of their report, they can be covered by their E & O insurance depending on how comprehensive the policy is.
Importance of E & O Insurance
The E & O coverage is very important and useful today to companies and here are the ways:
- It’s a way companies can transfer financial risk to insurance companies and focus on running their business effectively.
- It helps them avoid financial loss and hardship that could lead to bankruptcy associated with paying huge damages and legal fees.
- It helps a company maintain its financial position even after a huge lawsuit.
- It helps a company stay afloat as a going concern
- It helps a company keeps its best staff and all staff for that matter in employment from time to time.
How Much Does It Cost To Buy An E & O Policy?
An E & O policy like any other insurance policy is not as expensive as you think. The cost of getting one is way lower than the benefits that you get during the time of a claim. Certain factors determine the premium payable by a proposer who wants to purchase an E & O policy which include:
- Location of business
- Limit Any One Loss (Coverage limits)
- Number of staff/employees
- Claim history
All these factors are taken into cognizance when preparing the contract or policy document.
The bottom line here is that an E & O Insurance policy is a must-have for any serious-minded company operating in the finance sector, service sector, construction sector, and many more. It helps to keep your company safe as a going concern. We also discovered that the cost is not as high as people think it to be. Do yourself a favor, get Errors and Omissions Insurance.