Errors And Omissions Insurance: Explanation Of Errors And Omissions

Errors and omissions insurance will help you financially recover from being sued for making a business-related mistake. If your client claims you failed to complete or improperly performed a service, he is within his rights to sue you for any damages, as well as any loss of profit and reputation he may have incurred as a result.

A common misconception is that errors and omissions are covered by commercial general liability insurance; they are not. Errors and omissions insurance, commonly referred to as E&O, is a separate insurance policy that covers almost every industry for a seemingly endless number of error or omission scenarios.

Error and omission prevention is the best “insurance,” and policy premiums are based on what kinds of preventative measures you and your company have in place. Stay diligent and always improve the odds to stay error-free through:

  • Auditing your quality control procedures regularly.
  • Maintaining employee training and refresher courses for job responsibilities and safety procedures.
  • Clearly defining client and sub-contractor contracts.
  • Keeping paper and electronic documentation and communication for all contracts.

Set realistic goals and stay within your expertise. Do not make promises you are not sure you can fulfill. If you do make a mistake, take steps to prevent a recurrence whether you are sued or not. Your insurance broker will also be interested in the documentation outlining improvements you have made to avoid error and omissions lawsuits, as well as your track record for claims or the lack thereof.

Following basic risk management rules can also help keep you from avoiding errors and omissions claims.

Errors And Omissions Insurance: Explanation Of Errors And Omissions
  • Do not make false promises or give misleading information.
  • Make sure all contracts are very clear.
  • Do not make guarantees on delivery dates or any other aspect over which you do not have complete control.

Errors and omissions insurance coverage is divided into three categories. The first one is the retroactive date of inception which will cover a predetermined history that could have present-day claims of errors and omissions. The in-force section covers current contracts, and then there is the extended reporting component that covers a business or an individual long after they are no longer in business.

Even the most careful person or company can make a mistake. Errors and omissions insurance can financially protect you and your company.

Errors And Omissions Insurance: What Does Errors And Omissions Insurance Cover?

Business is fraught with opportunities to make huge mistakes and destroy your business’s finances and reputation. Errors and omissions insurance can protect you from the myriad of mistakes that can be made by you and your business associates.

Perhaps you have a client who is a retailer in England and he sells your widgets. Perhaps his business profits and reputation depend greatly on the sale of your widgets. You, in great faith, ship him his latest request of widgets but the shipping company sends them to China. Your English client can sue you for lost income and damage to his reputation.

If a client decides you did not fulfill your obligation to him, whether through an error or an omission, and he decides to sue you, you are inevitably faced with legal expenses. Your legal expenses can be quite substantial, even when your client’s complaint is not legitimate. Court costs, lawyer’s fees, and any settlements or judgments against you will be covered by your errors and omissions insurance.

As your business starts to grow, you bring on board additional employees and subcontractors to help you fulfill your increasing list of client contracts. As you increase your staff, you also increase the probability of error. Your business promises are now being fulfilled by several people and you no longer have complete control over quality and completion. Errors and omissions insurance can cover mistakes made by your W2 employees and your 1099 sub-contractors on and off-site.

As your business expands even further, you have new locations, long-distant clients and international business deals; your error and omission risk factor increases exponentially. You begin to depend on a large number of people that span across different cities, states, countries and even continents. You are now exposed to a wide variety of laws, business practices, languages and cultural differences, all of which greatly increase your chance for error. Your error and omissions insurance will cover you and your company no matter where in the world you do business.

For a small business owner or a startup company, a lawsuit can seriously damage and even ruin his business. Even large corporations can suffer severe setbacks from one lawsuit. Not only is it a financial hit, but also a loss of reputation, and for a small company, a bad reputation can guarantee failure.

U.S. courts tend to side with the complainant and are typically very generous in their judgments. Errors and omissions insurance will cover the court’s ruling.

Errors And Omissions Insurance: Who Needs Errors And Omissions Insurance?

Errors And Omissions Insurance: What Does Errors And Omissions Insurance Cover?

Everyone who does business should have an errors and omissions policy in place even before he opens his doors or launches his product; he can be blamed for a loss from day one. Different types of businesses have a different list of things that can go wrong. Keep your company financially protected from mistakes no matter what your industry.

Medical practitioners, such as doctors, dentists and chiropractors are covered for their mistakes under a similar policy called malpractice insurance.

There is also a similar type of coverage called professional liability insurance that protects a wide variety of professional services including:

  • Architects and engineers who can be sued for faulty structural designs that have caused a collapse and a loss of income for their client.
  • Internal business administrators such as accountants and quality controllers can make an improper judgment or oversight resulting in your client losing money on his own contracts.

Error and omissions insurance for agents who sell life or health insurance or real estate, has recently experienced extensive overhauls as more and more agents are sued for a larger variety of reasons, including liability for:

  • Wrongful acts during the process of providing, or the failure to provide, a service.
  • Illegal or immoral activities performed during the attempted sale, sale, or servicing of a product.
  • Deliberate or accidental withholding of information to a client during the sale of a product or service.

Any type of business that provides a service to a client for a fee is exposed to the risk of errors and omissions. Advertising agencies and commercial printers can be sued for graphic and text errors in a client’s advertising campaign that could result in their client being sued for false advertising.

Technology-based companies are still experiencing revamping of their error and omissions insurance coverage as insurers try to keep up with the pace of technology changes and inventions. A software designer can accidentally send a client a program with a virus that destroys his entire computer network, resulting in extensive repair costs and time lost.

A business that requires a sub-contractor to fulfill specialized aspects of a contract can cause damage to a client’s property. Your client will sue you for lost income and other related expenses.

It is human nature to err. Put in place safeguards to prevent error but also invest in error and omissions insurance to catch the mistakes that fall through your safety net.

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