We’re only human, and we all make mistakes. But for companies, the cost of putting things right can quickly snowball, reaching hundreds of thousands – or even millions – of pounds. If somebody makes a claim against your business for an error or oversight made by you or your staff, the company could find itself in a bank-breaking lawsuit. Errors and omissions insurance is a way for firms to protect themselves and their team financially from any legal action resulting from faults in their work.
This helpful guide takes you through the ins and outs of errors and omissions insurance, covering the following sections:
- What is errors and omissions insurance?
- What is covered by errors and omissions insurance?
- Do I need errors and omissions insurance?
- How much cover do I need?
- How much does errors and omissions insurance cost?
- How to find an errors and omissions insurance provider
- Final thoughts & FAQs.
What is errors and omissions insurance?
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.
What is covered by errors and omissions insurance?
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.
Are there any key 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.
Do I need errors and omissions insurance?
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
- IT consultants
- teachers, tutors, trainers and instructors
- accountants and those in financial services
- 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.
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.
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.
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.
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.
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.
How much cover do I need?
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.
How long should my cover last?
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.
How much does errors and omissions insurance cost?
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.
How to find an errors and omissions insurance provider
Before looking for an errors and omissions insurance supplier, the first thing to establish is any features of cover you need as well as a suitable indemnity limit, either by calculation or by consulting the relevant trade association. This can help narrow down your search by ruling out some providers from the start. If you work in a particularly high-risk industry, it may also be worth seeking a policy tailored to your sector. Once you’re ready to find an insurer, there are three ways you can find a suitable insurance solution.
Approaching insurers directly
Errors and omissions insurance, or professional indemnity insurance, is one of the more common types of commercial cover taken out by firms in the UK. Many insurance companies offer some form of E&O coverage, which they typically advertise on their websites. There, you can find details of the policy’s coverage, including exclusions and benefits. Many sites allow you to generate a quote online, or you can speak to one of their dedicated advisers to work out a suitable level of protection and to find a policy that’s right for you.
Using a broker
One of the most significant benefits of finding insurance via a broker is that they can help you calculate an appropriate indemnity limit for your business. It can be difficult for companies to predict the potential financial damage they might incur from giving poor advice or making a mistake. Brokers have years of expert industry knowledge and are familiar with the types of claims that third-parties may lodge against you, based on your business’ size, type and industry.
Not only can they help you determine an appropriate level of cover, but brokers also typically have access to a broader portion of the market than the general public. Similarly, many insurers offer exclusive deals to brokers with more extensive coverage for more competitive prices, which can save you money even after the broker has taken their commission.
Using comparison websites
When searching for any insurance, the choice on the market can seem overwhelming, and with more and more providers offering E&O cover, it can be challenging to know where to start. Comparison websites can provide a helpful starting point by collating various products on the market from multiple providers, allowing you to compare the features and prices of each policy easily. Many sites allow you to set different parameters and criteria to narrow down your search results to quickly find solutions which correspond to your needs.
Final thoughts & 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.
Do medical professionals need errors and omissions insurance?
Claims of professional negligence that have the largest impact can be mistakes made by medical professionals. Claims of this kind tend to come with the costliest settlement fees, too, particularly if the allegation involves an oversight which threatened somebody’s life. Typically, professionals working for the NHS have some level of indemnity through a clinical negligence scheme, such as the Clinical Negligence Scheme for Trusts (CNST) which operates in England.
That said, it is essential to clarify what level of protection you have under these schemes. You may want to consider extending your cover if you feel it falls short. Similarly, all private medical professionals must consider taking out sufficient cover to protect themselves against allegations of professional negligence. As the claims faced by doctors and nurses differ significantly to those affecting financial advisers, for example, many insurers offer specialist policies tailored to protect healthcare professionals.
Do I need errors and omissions insurance if I work from home?
Whether you work from home as a freelancer or you run a multinational corporation from multiple locations, you may need errors and omissions insurance. Whether you need E&O cover comes down to the type of work you carry out. Therefore, anybody giving advice, handling data or providing a service should consider errors and omissions insurance, no matter where they work.
Is errors and omissions insurance 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.
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.
It is important to note that you typically cannot purchase E&O cover because you have reason to believe a claim is imminent. Underwriters will want to be sure that you aren’t backdating your coverage to protect against a claim that you suspect is on the way, and they may investigate to verify this. If something comes to light later down the line that suggests you had an ulterior motive for taking out your policy, this could invalidate your cover. As a result, it’s crucial to consider errors and omissions insurance from the moment you start trading, to avoid gaps in your coverage.
What’s the difference between errors and omissions insurance and public liability insurance?
Both these policies cover companies against legal action brought against them. However, they differ in the types of claims they cover. As we’ve seen, E&O insurance covers claims of financial loss relating to professional negligence, a mistake, oversight or breach of contract on the part of the service provider.
Public liability insurance covers businesses against claims made by third parties of negligence or liability, which have led to illness, bodily injury, property damage or death. Examples might be poor site maintenance which causes damage to a visitor’s car, or an obstruction on the business premises, which leads to a customer falling and sustaining a leg injury. While neither form of insurance is a legal obligation, they can protect companies against the costliest types of liability claims. Businesses typically take out public liability insurance and errors and omissions insurance together.