Errors & omissions insurance is a special type of liability insurance that covers individuals or companies offering service in the event that a client holds the provider responsible for services that one offered, failed to offer or did not produce the expected results. Other terms used are: professional indemnity insurance and professional liability insurance. Even though the clients’ allegations are groundless, thousands of dollars may be required to defend the lawsuit. Such lawsuits can be an end to the operation of small businesses and affect largely the operation of the large companies.
Which businesses require E & O insurance?
Businesses that need this kind of insurance are those that:
- Offer a professional service
- Is required by its customers to have the insurance
- Provides advice regularly
The professionals who are best known to take up this policy are accountants, doctors, lawyers, engineers and architects. Not many people who are into event organizing, advertising agencies, web hosting, plumbing, electrical works, HVAC, contractors and sheer metal workers take this policy despite it being vital in their professions. They ought to take error and omission insurance because it can save them in a big way.
Why you should buy an E&O insurance coverage
Costly mistakes might happen during operation. Regardless of the kind of training or level of experience, making errors is part of human nature.
Take for instance, a plumber was to carry out trenchless repair. However, he records the street name wrongly and thus ends up repairing the wrong sewer system. Who is to pay for the extra costs?
Imagine if an accountant was doing bookkeeping and forgot to include a certain transaction on the balance sheet. The omission of the transaction causes uproar by the shareholders of the company; what happens? Who is to pay for the error?
When a company that is insured makes an error, there is little or no loss of reputation for both the business and the client.
On the other hand, if a company decides not to purchase this insurance, it is taking a big financial risk. Such losses are not covered by the general liability policies.
What type of E&O should you buy?
These policies vary from company to company. They are written to replicate the inherent risk as well as common exposures specific to various kinds of businesses. A plumber, doctor, computer programmer all faces risks of error and omission. However, one policy would not be appropriate for all. Instead, a suitable policy should be crafted for each so as to ensure it covers the areas of their risks.
When should you buy?
Similar to other insurance policies, the best time to purchase is before the risk is taken. If you provide services and you know that you might have the exposure, then include E&O in your insurance portfolio. Some clients require the provider to have the policy. In fact, it is a selling point to clients; since they are at peace knowing that they will be compensated in case of any omission or error.
Getting an E&O coverage
Retroactive dates- the impact
Claims should be made within the policy period. This explains why most of the policies are written on a “claims made and reported” or “claims made” form. Such policies have retroactive dates which are very significant. If a claim arises from acts committed either before or after the retroactive dates, it is not covered. Also, the further back the retroactive dates, the more the coverage time.
Why hire an insurance expert for guidance?
Some policies will include defense expenses with limited liability. Others will exclude punitive damages. The wording used on the policies may vary greatly and this may affect the effectiveness of the policy. Each policy should thus be analyzed carefully to ensure that it covers the exposure. This means that one should find an insurance expert who understands the E&O coverage so that they can guide you. This way, you can be sure to get a coverage that fits your exposure.
The cost of the policy depends on the location, claims experience and class of the business. They also vary depending on the insurance company.
What is required?
You will be required to submit a description of the quality control procedures, copies of contacts, training procedures, and documentation procedures to the insurance underwriter. In some cases, they may only ask for a completed application. The underwriter will consider you experience so as to gauge if you have had claims or if you have not had any. If you have not had any, they will investigate to find out what could have made you not have any claims.
How to avoid claims
- Give realistic expectations to clients
- Have quality control procedures and carry out audits often
- Always have a well written contract that spells out all the terms of service