Errors and omissions insurance, known as E&O insurance, is a type of liability insurance which helps protect companies and their employees, or independent working professionals, against claims of negligence or inadequate work. It’s typically taken out by anybody giving professional advice or providing a service, such as financial advisers, insurance agents, doctors and lawyers.
Poor advice or sub-par work can result in a financial loss for the customer, such as losing money following poor investment advice. Should the customer make a claim, the company accused may face expensive court fees and, if the case is successful, hefty compensation payouts. The company may even have to foot the bill for the claiming party’s legal fees, on top of their own. This kind of policy can cover the costs of these types of claims, protecting businesses financially for mistakes and oversights in the services they provide.
Errors and omissions insurance is sometimes known as professional indemnity insurance. Many providers use the terms interchangeably, and they largely refer to the same product, covering similar risks. ‘Errors and omissions’ is a term more commonly used in the USA, whereas ‘professional indemnity’ (PI) is more prevalent in the UK.
Common Policy Coverage
E&O insurance can cover a range of claims of financial loss made by clients or other third parties against a company or a specific person. Typically, it covers allegations against the policyholder, as well as any of their employees and, sometimes, freelance contractors. The types of claim for which a policy can provide cover include:
- Professional Negligence – Typically, these refer to mistakes made by your company or one of your employees or cases where you failed to do something that you should have as part of your job.
- Unintentional breach of copyright or data protection – A company may accidentally leak client data, or an employee may send an email with sensitive information to the wrong recipient. If a company fails to seek permission before using a copyrighted image, this could also result in legal action against them.
- Loss of data – Claims of this nature typically relate to accidental deletion of files, losing or damaging confidential documents or a system breakdown resulting in lost data.
- Defamation and libel – If anybody in the company has made a false statement about a client, competitor or another third-party, they may be sued for defamation, having harmed the claimant’s reputation. Compensation fees may cover the loss of earnings an entity suffers as a result of reputational damage.
If a third party successfully sues for any of the above reasons, the liable company typically has to pay for the legal proceedings as well as any settlements awarded. Once all the costs have been accounted for, this amount may reach the millions. Fortunately, errors and omissions insurance typically covers the cost of:
- court fees
- legal fees
- legal fees of the claimant, if the claim is successful
- compensation payouts and settlement fees
- expenses incurred from losses owing to reputational damage.
Exclusions
As with any insurance policy, errors and omissions insurance tends to come with specific exclusions. Usually, E&O plans have the following limitations:
- Geographical limits. Some policies only apply to claims made by customers in certain countries. Some policies only cover the UK, while some providers may allow you to extend the policy to cover the EU, worldwide excluding USA & Canada, or comprehensive worldwide cover for protection around the world.
- Sometimes, companies find themselves the target of a claim due to the work of a freelancer or contractor they have hired for assistance with a project. Not all insurers cover this kind of help, or they may only insure some forms of external contracting under certain conditions. Be sure to clarify their position on subcontracting before you take out a policy to make sure you aren’t found liable, and left unprotected, for someone else’s mistake.
- Bodily injury. Many professional indemnity policies exclude claims relating to physical injury, even if this is the result of professional negligence. This may exclude cover for certain professions, such as personal trainers, where professional negligence could result in a client’s injury. If this could apply to you, it’s essential to clarify the extent of coverage an insurer can provide before purchasing a policy.
Highly-Relevant for Service-Based Businesses
The types of claims covered by errors and omissions insurance are typically relevant to service-providing companies, where poor service, mistakes or omissions result in a financial loss for the client. That said, all business types that offer advice, provide a service, or handle sensitive data can make mistakes that might trigger a third party to pursue legal action. Some of the professions that commonly take out E&O cover include:
- business and management consultants
- architects
- engineers
- IT consultants
- designers
- teachers, tutors, trainers and instructors
- accountants and those in financial services
- surveyors
- recruitment professionals
- insurance agents.
All of these professions provide advice and services that, if found to be misleading, inaccurate or sub-par, could result in a loss for their clients. It’s also vital that sole traders consider E&O cover if they provide a service or give advice, as they could be liable to the same types of claims and, typically, are less likely to have the funding to foot the bill for the resulting lawsuit. If you’re unsure whether you need errors and omissions insurance, consider the following examples where E&O insurance could help professionals cover themselves financially.
- Software Engineer – A large business may purchase some sales software to generate online sales. If the software crashes, resulting in two days of lost revenue, the firm could sue the software company for providing an inadequate product. If the claim is successful, the settlement fee may cover the company’s lost earnings for the period that the software was down, as well as their legal fees, reaching a settlement in the tens of thousands. On top of the compensation, the company may have to fund their own legal costs. Negative press following the event could see a drop in their sales that month, contributing to an overall loss in the hundreds of thousands. An E&O policy could cover the full costs of the claim, minus the excess fee.
- Accountant – An accountant might advise a client to invest in a company. Should the acquired company fold shortly afterwards and the client loses their investment of hundreds of thousands of pounds, the client could sue the accountant for failing to inform them of the potential risks or offering poor advice prior to the acquisition. The settlement fees and costs could be enough to bankrupt the accountant. Fortunately, an errors and omissions insurance policy can cover the costs of this type of claim.
- Graphic Designer – If a graphic designer creates a brand logo for a client which incorporates a copyrighted image, without seeking the owner’s express permission, the owner of the image may sue the designer for intellectual property theft and breach of copyright laws. An E&O policy can typically cover this type of claim and the resulting payout.
- Real Estate – Errors and omissions insurance can also be necessary for those working in real estate. If you approve a problematic tenant, a client may accuse you of professional negligence. Similarly, if you fail to point out the pitfalls of a property, clients may sue you if they lose their investment. Legal proceedings in both these cases could have coverage under an E&O policy.
- Insurance Agents – Ironically, professionals in need of errors and omissions insurance are often insurance agents themselves. Many claims relate to unfulfilled promises, such as failure to deliver promised insurance services or misrepresenting the coverage of an insurance product, leaving clients liable pay for the issue out their own pocket. If they sue you for their financial loss and you’re found liable, their compensation payout may include the cost of covering their lost insurance case, compounding the payout for you.
Required Coverage Level
There’s no one-size-fits-all solution for a suitable level of errors and omissions insurance. The first thing to consider is whether your company has any contractual obligations, where clients have stipulated a minimum level of cover. Errors and omissions insurance is not a legal requirement, but some regulatory bodies may also demand a minimum level of cover, which is usually the case for architects, accountants and solicitors. Alternatively, there may be an industry-wide standard to adhere to, to attract clients.
Secondly, you need to consider the types of projects you undertake, and the maximum potential impact, should something go wrong. Bear in mind not only the cost of the work but also the possible financial loss for the client, your company’s loss of earnings resulting from reputational damage and the value of your legal fees and theirs. Typically, limits start at £50,000 and go up to £5 million, though larger enterprises may be able to arrange extended cover.
Length of Coverage
If you are taking out an E&O policy, it’s also worth considering how long you need the coverage to last. You must get cover from when you start trading, as E&O insurance typically works on a claims-made basis. This means that the insurance you have in place at the time a claim is filed against you is the policy on which you make an E&O claim, even if the issue occurred some time ago when you had a different insurance plan in place.
People have been known to submit claims years after the event in question. That’s why any business or sole trade needs to consider run-off insurance once they cease trading. Run-off cover protects the business against legacy claims against issues that occurred while the company was in operation, as clients typically have up to six years to claim against breach of contract. Many regulatory bodies and trade associations, therefore, require the companies they regulate to have errors and omissions insurance in place for at least six years after they close down.
Cost and Tax Treatment
The price of an errors and omissions insurance policy depends on your level of risk. An insurer will take into account the following information to determine how much you pay for your protection:
- your business type
- the industry in which your business operates
- the kind of work your company carries out
- the size of the business
- the level of cover you have chosen
- the amount of excess you choose.
Typically, higher risk industries are those that offer legal, financial or medical advice and those that deal with large amounts of sensitive data. A higher limit of indemnity tends to mean higher premiums, and larger companies often pay more as they deal with far more clients. To get a price estimate, you can run a quote online in just a few minutes by using the quote generator on various insurance suppliers’ websites, by simply entering a few details.
Tax Deductible
Typically, yes. Errors and omissions cover, or PI cover, tends to constitute an ‘allowable expense’, considered essential to the smooth running of a business. You can therefore usually deduct the cost of your premiums from your taxable profits on your tax return. For all tax advice, it’s essential to seek accurate information and advice from HMRC.
Final thoughts and FAQs
Mistakes happen. But mistakes for some businesses are costlier than others. A minor oversight can quickly escalate into a substantial financial loss for a client. Bundle this together with a hefty compensation payout, lost revenue from a tarnished reputation and the legal fees of both parties, and even the maturest of companies can face a sum that threatens bankruptcy.
Errors and omissions insurance can offer peace of mind to business owners, removing the financial burden of professional mistakes and mishaps.
- Can You Backdate Your Errors and Omissions Cover? – If you decide to take out errors and omissions insurance sometime after you began trading, you can still cover work done in the period you were without cover, by requesting that insurers backdate your cover. The retroactive date in your policy indicates the date from which your work has protection. Retroactive cover is an optional add-on offered by many insurers, typically at an extra cost.
