What Is Errors and Omissions Insurance?

Errors and omissions (E&O) insurance is a type of liability insurance that covers claims against your business for mistakes you made or services you failed to provide. E&O insurance protects your business from claims by clients for negligence, malpractice, errors, or omissions you allegedly made while providing a professional service. The insurance helps pay for your legal fees and any owed damages or settlements.

Understanding E&O Insurance

E&O insurance, also known as professional liability coverage, protects your business from claims by clients for errors or mistakes, faulty advice, or failure to provide the level of service your client expected. It also covers claims based on your failure to do the work, meet a deadline, or otherwise fulfill the terms of a contract. 

For example, suppose a furniture manufacturer hires your IT consulting company to upgrade its computer-aided manufacturing software. Several months later, the client sues your company for $50,000, claiming you provided inadequate advice on using the new software. Because of your faulty instructions, their machinery malfunctioned, and they were unable to fill two large orders. 

An E&O policy might pay for damages or settlements arising from those claims. It may also cover attorneys’ fees, court costs, and other legal expenses your insurer incurs to defend your business against the lawsuit, whether or not the claim is valid or your business is found liable.

Who Needs E&O Insurance?

You should consider buying an E&O policy if your business involves giving advice or providing a professional service for a fee. Many types of businesses fit this description, including accountants, architects, real estate agents, consultants, financial advisors, wedding planners, fitness instructors, and physical therapists.

Some types of professionals may be required by state or federal law to buy E&O insurance before going into business, such as attorneys, contractors, and medical professionals. Some businesses may need E&O insurance to get or renew a professional license or to comply with the terms of a client contract.

What E&O Insurance Doesn’t Cover

Many E&O policies exclude claims resulting from any of the following:

• Bodily injury or property damage
• Employment-related acts such as wrongful termination and discrimination
• Fraud or criminal acts
• Injuries to workers
• Infringement of patents or other intellectual property violations
• Data breaches
• Theft of sensitive data

Your policy may contain additional exclusions. Read it carefully so you understand what it does and doesn’t cover.

How to Choose an E&O Policy

Covered Risks

The right choice for an E&O policy depends on the nature of your business and the risks you want to insure. Many E&O policies are designed to cover a specific occupation, such as attorneys, accountants, or real estate agents. When choosing a policy, be sure it covers the kind of business you operate. 

Some E&O policies cover additional risks common to businesses in many occupations. An example is employment practices liability insurance, which covers claims against businesses that result from workplace violations such as discrimination and wrongful termination. 

Coverage Limits and Costs

Like any insurance, your E&O policy will be a tradeoff between cost and the amount of protection. Policies that offer more coverage typically cost more. When comparing policies, check both the per occurrence limit and aggregate limit. The per occurrence limit is the most the policy will pay per lawsuit/claim and the aggregate limit is the most the policy will pay total. For example, an E&O policy might offer $250,000 per incident and up to $1 million aggregate. 

When you compare insurers on cost, make sure it’s an apples-to-apples comparison of total coverage. You should also check the policy deductible. This is the amount you must pay out of pocket first before the insurance kicks in. Policies with a higher deductible usually charge a lower premium.

Most E&O policies are claims-made, meaning they cover claims made against your business during the term of the policy. A claims-made policy won’t cover claims filed against your business after your policy expires. 

Some insurers offer E&O insurance on occurrence policies, which cover claims arising from incidents that occur during the policy term, no matter when the claim is filed. Because occurrence policies provide broader coverage, they are more expensive than their claims-made counterparts.

How to Buy E&O Insurance

If you need E&O insurance, a logical place to start is your general liability insurer. Many insurers that sell business insurance offer E&O coverage. Some will add E&O coverage to a general liability or business owners’ policy via an endorsement. If your liability insurer doesn’t offer E&O insurance, you can ask your business insurance agent for quotes or get quotes yourself online. 

The cost of E&O insurance varies by industry. A building design company will likely pay more than a hair salon or massage therapist. Other factors that affect your premium are the size of your business, your claim history, and the limits you choose. Many small businesses can buy an E&O policy for about $735 per year.

The Bottom Line

Errors and omissions insurance (also called E&O or professional liability insurance) protects your business from claims arising from negligence, faulty advice, errors, or omissions. E&O insurance covers damages, settlements, and legal costs that result from covered claims. You likely need E&O insurance if you or your employees give professional advice or provide a service to customers for a fee.