Errors & Omissions Insurance

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What is Errors & Omissions Insurance?

Errors & Omissions (E&O) in the US, is a form of liability insurance which helps protect professional advisors and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit. The coverage focuses on alleged failure to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the policyholder. These are causes for legal action that would not be covered by a general liability (GL) insurance policy, which addresses more direct forms of harm. Professional liability insurance may take on different forms and names depending on the profession, especially medical and legal, and is sometimes required under contract by other businesses that are the beneficiaries of the advice or service. E&O is also known as Professional Liability Insurance or Professional Indemnity Insurance.

Coverage sometimes provides for the defense costs, including when legal action turns out to be groundless. Coverage does not include criminal prosecution, or a wide range of potential liabilities under civil law that are not enumerated in the policy, but which may be subject to other forms of insurance. Professional liability insurance is required by law in some areas for certain kinds of professional practices.

Errors and Omissions Insurance Coverage Texas

Why E&O is Needed?

The primary reason for professional liability (E&O) coverage is that a typical general liability insurance policy will only cover claims arising from a bodily injury, property damage, personal injury or advertising injury claims. Other forms of insurance cover employers, public and product liability issues. But various professional services and products can give rise to legal claims without causing any of the specific types of harm covered by such policies. Common claims that professional liability insurance covers are negligence, misrepresentation, violation of good faith and failed dealings, and inaccurate advice. Examples:

  • If a software product fails to perform properly, it may not cause physical, personal, or advertising damages, therefore the general liability policy would not be triggered; it may, however, directly cause financial losses which could potentially be attributed to the software developer's misrepresentation of the product's capabilities.
  • If a custom-designed product fails without causing damage to person or property, other than to the subject product itself, a product liability policy may cover consequential damages such as losses from business interruption, but will generally not cover the cost to redesign, repair or replacing the failed product itself. Claims for these losses against the manufacturer may be covered by a professional liability policy.
Liability Insurance in Texas

Who Needs Errors & Omissions?

Errors & Omissions (E&O) is a type of liability policy. It is used by insurance agents, consultants, brokers and lawyers while the medical professions refer to it as malpractice insurance. Other professions that commonly purchase professional liability insurance include accounting, engineering, financial services, construction and maintenance (general contractors (GC), plumbers, etc., many of whom are also surety bonded), and transport. Some charities and other nonprofit/NGOs are also professional-liability insured. Errors and omissions insurance policies usually cover the business owner, both salaried and hourly employees, and subcontractors working on behalf of the business.

Errors and Omissions Insurance Policies Texas

What type should I buy?

Errors and omissions insurance policies vary from company to company, and are written to reflect inherent risks and common exposures particular to different types of businesses.

Some events resulting in a loss for a client may have occurred several years in the past, and the first time the mistake is apparent is when a court summons arrives in the mail. That’s when the retroactive date on the policy is very important. The farther back the retroactive date of the policy, the more coverage and protection it offers.

Even if claims are found to be unwarranted, legal fees and other related expenses can quickly eat up a company’s cash reserves in no time, causing a financial hardship. Most errors and omissions insurance policies cover judgments, attorney fees, court costs and settlements up to the limits of the policy.