Who Should Buy Errors & Omissions Insurance?

The Errors & Omissions Insurance (E&O) policy shields you and your company against lawsuits that may be filed by those customers, stakeholders, etc.; who have incurred losses due to your services or products. Also called professional liability insurance, the E&O insurance policy covers judgment, settlement, and various defense costs. Even if the allegations are false, thousands of rupees could be required to defend the lawsuit, which can bankrupt a company and even ruin its reputation.

Key Takeaways

• The “Human Factor”: Regardless of awards or years of experience, mistakes are an inherent part of being human. E&O insurance acknowledges this reality by providing a safety net for unintentional professional lapses.

• Defense Costs vs. Claims: Even if a client’s allegations are completely false, the cost of defending yourself in court can run into lakhs. E&O insurance is vital because it pays for your defense, preventing a baseless lawsuit from bankrupting your company.

• Beyond Traditional Professions: While doctors and lawyers are the “standard” candidates for this cover, it is equally essential for modern occupations like commercial printers, wedding planners, and advertising agencies.

• Protection Against Employee Errors: As a business owner, you are responsible for the actions of your staff. If an employee provides incorrect information or a faulty recommendation, the E&O policy covers the resulting liability for the company.

• The High Cost of Non-Insurance: As seen in Case 1 (J.S. Programming), failing to have a policy means paying both the client’s compensation and your own legal fees out of pocket, which can be a “business shock” that is difficult to recover from.

Read More: What is Errors & Omissions Insurance?

In most of the cases, the best-known professionals who need professional indemnity insurance policies are lawyers, engineers, doctors, architects, etc. However, fewer thought occupations or professionals who need the policy range from advertising agencies, commercial printers to wedding planners.

Overall, if you are in the business of offering products or services to customers, you should buy a professional liability insurance policy.

Regardless of how many awards you have won, how many years of experience you have under your belt, the bottom line is that we all are human beings and mistakes are bound to happen. Even when you have the best employees and the most viable risk management practices in place, errors can happen. Unfortunately, one small mistake can cause lots of financial losses.

Case: 1

Jayant Sinha owns and manages J.S Programming, a small company that offers various programming services. The company develops customised software programs as per the divergent needs of its clients.

Last month, Jayant got a business shock when he received a legal notice. The plaintiff was K.M Hardware, a small chain of hardware stores. K.M Hardware had hired J.S Programming to create an inventory management and tracking system which J.S completed and installed at the hardware chain nearly four months ago.

Now, K.M Hardware filed a lawsuit claiming that the program was full of bugs and as a result, they found it difficult to use it. The suit also alleged that J.S Programming did not test the program efficiently and this negligence cost K.M Hardware lakhs of rupees.

Unfortunately, J.S Programming did not have the Errors & Omissions Insurance policy, and as a result, Jayant Sinha had to pay the compensation and legal charges from his pocket. The situation would have been different if Jayant had bought a professional liability insurance. In this case, in addition to covering the compensation amount, the insurer would have covered the legal charges as well.

Case: 2

After working in a corporate world, Ravi Kumar decides to start his law firm. With an experience over ten years, Ravi is confident that his skills and expertise will help him grow his business. While finalising his office space and furniture, Ravi should also buy a professional indemnity insurance, which will help him in case any of its clients suffer loss and files a legal case against him.

Finance is the tricky area, and even after due diligence, you can’t give a guarantee that everything will be error-free. For instance, what if Ravi unintentionally miscalculates numbers which increase the tax implications of his client? He could be held legally responsible for it. In this case, Ravi would have to pay the compensation amount from his pocket in case he finds guilty. However, by buying Errors & Omission Insurance Policy, Ravi can share his financial burden with his insurer who would come forward for his help in case legal case is filed against him. In addition to paying the compensation amount, the insurer will also cover legal expenses.

Summary Table: E&O Insurance Scenarios and Impact

Case: 3

Assume you have a technology consulting company and one of your employees recommends certain billing system to a client. However, this system doesn’t work as per the expectations because your employee puts some incorrect information into the system, costing the client some financial losses. Now, the client expects you to cough up for that loss.

Without the E&O insurance policy, you would have to incur all the financial losses all by yourself. If you had an E&O insurance policy, you’d be covered as long as they were not intentionally done to cause losses or damages to third parties. The insurance company would cover compensation along with the legal charges.

Frequently Asked Questions (FAQs)

1. Does E&O insurance cover me if I intentionally provide wrong advice?

A) No. The core principle of E&O insurance is to cover “unintentional” errors, omissions, or negligence. If it is proven that a professional deliberately caused harm or acted fraudulently to cause a loss, the insurance company will reject the claim.

2. Is there a difference between Professional Indemnity and E&O insurance?

A) No, they are different names for the same type of coverage. “Errors & Omissions” is more frequently used in technical and creative fields (like IT or Media), while “Professional Indemnity” is the preferred term for traditional fields like Law and Medicine.

3. If a client sues me but we settle out of court, will the policy still pay?

A) Yes, provided you have obtained the insurer’s prior consent before agreeing to the settlement. Most E&O policies are designed to cover both court-awarded judgments and negotiated settlements to resolve a dispute efficiently.

4. Does the policy cover “Lost Profits” for my client?

A) Yes. If your professional error (like a bug in an inventory system) causes a client to lose significant revenue or incur extra expenses, they can sue you for those financial losses. Your E&O policy is specifically designed to indemnify you against such claims.

5. How much coverage should a small startup like J.S. Programming carry?

A) The “Sum Insured” should be based on the maximum potential loss a client could suffer. Even a small startup should consider the value of their largest contract and the “worst-case scenario” costs of a total system failure when choosing their limit.

About The Author

Amit

MBA Finance

Amit is an experienced insurance professional with 7 years in the industry, specializing in Errors & Omissions Insurance. Writing for SecureNow, he provides clear and insightful blogs and articles to help professionals understand the importance and nuances of E&O coverage. His expertise ensures that readers receive practical advice on protecting themselves from potential liabilities and professional risks. Dedicated to making complex insurance topics accessible, Amit stays updated on industry developments, delivering valuable content that empowers professionals to make informed decisions about their E&O insurance needs.