How to limit corporate liability with errors and omissions insurance
Errors & omissions insurance is an essential investment for most business enterprises. No company or employee is infallible. However, in today’s cutthroat business arena, even the slightest error can end up costing a client thousands or even millions of dollars worth of loss. In such a case, the customer or customers are likely to sue your business for heavy damages.
Such lawsuits tend to be highly expensive, and even if the plaintiff’s allegations are found to be groundless, thousands of dollars would still have been consumed in defending the company. This can cause lasting damage to a company’s profit margin, and even bankrupt it. This is where E & O insurance comes into the picture.
What do you mean by E & O insurance?
Errors and omissions insurance, also known as professional liability insurance, helps protect your business from potentially ruinous litigation and business losses that arise as a result of an error or omission on part of your business or by one of your employees; specifically those that lead to a financial loss for a client or clients.
The majority of E & O policies cover expenses related to potential lawsuits such as legal defense charges and settlements. They typically cover claims of negligence arising from mistakes, errors in judgment, bad advice and/or recommendations on part of the insurance claimant. E&O policies are typically bought by either small business owners or freelance professionals such as architects, financial planners, real estate agents, doctors and accountants. A good E and O policy covers not just the actions of a company’s immediate employees, but also any and all subcontractors hired by the former.
There are two main types of Errors & Omissions insurance: occurrence and claims-made. Occurrence based professional liability insurance is broader in application and offers open-ended coverage as long as the causative incident happened during the time period the policy was in force. Claims-made policies however are more restricted in their scope. They only offer coverage if both the instrumental incident as well as the resulting negligence claim occur between the E and O policy’s inception and expiration dates.
To conclude, the type and validity of coverage your business receives under E and O insurance varies greatly depending on whether it is occurrence or claim based. It is therefore critical that you read the offer document carefully before signing.
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