Errors & Omissions: Liability Insurance


Summary

Errors and Omissions are generally a part of an individual’s daily lives. But if errors lead to significant losses for a company it could turn disastrous. Some cases where something like this could happen are – if you purchase a new home from a realtor and they fail to mention that the roof of the home requires repairs and you experience roof damage within 2 days after you take possession of the home.

In such cases, you would be left with repair bills due to the omission of information by the realtor and you could even sue the realtor for the damages incurred by you. If the realtor has an errors and omissions policy, however, then the insurance company would compensate you on behalf of the insured. 

Consider another scenario where you have given a Public Relations (PR) agency the task of developing an ad for your upcoming product in the market. The ad is supposed to create awareness among the customers regarding your new product. But due to the errors made by the PR agency, the ad becomes a disaster and results in market share erosion of your company. If you sue the PR agency and they have an E&O policy, the Insurance company would compensate for your losses on their behalf.

Another example could be an XYZ tax firm that misinterpreted your income tax and had filed wrong tax filings which led to you ending up paying the penalty for the mistake committed by the tax firm. The inaccurate advice given by the tax firm has resulted in financial loss to you and this loss can be recovered from the tax firm by suing them in the court.

These are some common examples where the E&O policy can be used to avail compensation from the opposite parties in case they have erred.

Types of coverages under the E&O policy.

Coverage: 

  • Inaccurate advice: It could happen that sometimes professionals might give inaccurate advice to you, that could result in financial losses apart from mental agony. For example, your investment advisor might inaccurately advise you to invest in a certain fund which may result in loss of the fund value. There could also be a case where one of your employees provides wrong or inaccurate advice to a client. The client suffers losses and decides to sue you. E&O policy provides protection in such cases where any of your employees commits an error in the process of offering services to your clients. 
  • Violation of good faith and fair dealing: There could be instances where your employees might have violated the good faith of your clients such as leaking the confidential information of the contract to the other parties resulting in financial loss to your client. Every contract that you enter into has an implicit duty for you – you are to protect your clients information and rights; in the absence of upholding such duties if your client suffers a loss, they may sue you. 

The E&O policy also protects the businesses against accidental breaches of the written contracts. Someone might infringe upon your original creation or patent or someone might copy your work – in all such cases, and E & O will protect you.

  • Negligence: If any of your employees has displayed negligence that resulted in financial loss to your clients, then they could sue you for their losses. But if you are covered under an E&O policy, you could recover these losses from the policy. For example, you own a website design company and one of the websites designed by you was found to have security gaps that resulted in hacking the website and data breach. In such cases, you would be held liable by your customers for your negligence in the work carried out. Negligence could also happen when you as a firm fail to design a product that meets the industry standards thereby causing financial loss to your customers. If your customers sue you, such damages can be recovered from an E&O policy.
  • Misrepresentations: The other coverage in E&O policy is for the false and misleading statements. For example, as discussed earlier, a real estate agent might give wrong information about the house which causes financial losses to the customer. If the customer sues the agent, and the agent has an E&O policy, such damages can be covered under it.
  • Undelivered services: This includes the services agreed upon between the firm and the customer but are not delivered to the customer due to various reasons. For example, your software developing company might have promised to deliver software to a customer, but failing to do so on time has resulted in losses to the customer. In such cases, as a company you would be held legally responsible to compensate the losses suffered by your customer. E&O policy also covers the losses incurred by your client due to missed deadlines by your company. 
  • Lawyer fees & Settlements: Finally, E&O policy compensates you for the legal expenses incurred by you to fight the cases. The policy provides lawyer fees and other legal fees required by you as per the terms and condition of the policy. The policy could also help with out of court settlements depending on the merits of the case. 

Limitations of E&O policy 

  • Intentional misconduct: Deliberate acts of wrongdoing, fraud, or criminal activity are not covered.
  • Dishonesty: E&O policies don’t extend coverage to situations where the insured intentionally misleads or deceives clients.
  • Pre-existing knowledge: If you were aware of an error or omission before obtaining the policy, it likely won’t be covered.
  • Regulatory fines and penalties: Fines imposed by government bodies for non-compliance are not typically covered under E&O insurance.
  • Employment related issues: Workplace disputes, discrimination claims, or wrongful termination are generally not covered by E&O policies.

The benefits offered under an E&O policy could be of tremendous value to companies. It is however important to note that there could be variations in coverages offered by different insurers. E&O policies also typically exclude intentional wrongdoing or fraudulent acts. Consulting an insurance professional is there recommended to ensure you choose an E&O policy that aligns with your specific needs and risk profile.

FAQs

  1. Does E&O policy cover sexual harassment and other wrongful employment practices?

    No. E&O policy doesnt cover sexual harassment and other wrongful employment practices such as termination, denying promotion on the basis of age, race, religion, sex etc. You need to take D&O policy to avail cover for the above mentioned issues.

  2. Does E&O policy cover bodily injury and property damage?

    No. E&O policy is not designed to cover bodily injury and property damage to third parties. For this cover, you may purchase a third party liability policy or Commercial general liability policy.

  3. Is there a provision in E&O policy to cover work related illnesses or injuries?

    There is no provision in E&O policy to cover work related illnesses or injuries. For this cover, you may purchase a Workmen compensation policy.

  4. Who can take E&O insurance policy?

    Accountants, Advertising companies, Graphic designers, Interior decorators, Tax consultants, Technology professionals etc.

  5. What factors decide the premium in an E&O policy?

    Size of the business, revenue of the business, industry type and the types of risks faced by that particular industry, location of the business, claims history and coverage under the policy.

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Susheel Agarwal