Errors and Omissions Insurance
Oops! We’ve all done it at some point in our lives. We make a mistake while serving a client. Mine cost me a little over $2,000 in penalties to the Internal Revenue Service for failure to file an extension on a partnership tax return. Not a good day.
My mistake wasn’t that expensive in the overall scheme of things. Sometimes these mistakes can create lawsuits due to the magnitude of the error. When the lawyers get involved, you know it is going to be expensive. To protect against mistakes, many professionals purchase errors and omissions insurance. Commonly referred to as E&O, this insurance eliminates risk to the provider of professional service related conduct. What exactly does errors and omissions insurance protect? How does it work? What is the typical cost? What do I need to know when I am purchasing this type of insurance? The following sections explain E&O.
Detail Explanation of Errors and Omission Insurance
A standard general liability insurance policy covers damages related to physical body damage or property damage. Other forms of insurance cover issues related to workers (Worker’s Compensation Insurance) and transportation (auto). But another form of insurance was created to protect against financial losses generated due to poor or improper conduct of a professional. It was a byproduct of malpractice insurance which are policies purchased by medical professionals (doctors, dentists, chiropractors etc.) related to the services they render.
Those professionals that require a license and must pass a national exam (extensive education requirement) purchase insurance called Professional Liability. These professionals include:
- Mental Health Providers
Other professionals (license, certified or recognized legal status) desired to reduce or eliminate their risk associated with providing advice or failure to comply with all documentation related to their client issues. Thus errors and omissions insurance exist in the market today. The types of professionals I’m referring to include:
- Real Estate Brokers/Agents
- Insurance Agents
- Technology Consultants (Software and Hardware Designers)
It has gone even further where some providers of financial based organizations purchase this insurance to protect them from failure to provide the correct information in a timely fashion. These include:
- Title Insurance Providers
- Real Estate Researchers
- Payroll Service Providers
- Loan Processors
- Human Resources Providers
- Retirement Planners
- Advertising Agencies
- Commercial Level Printers
Notice the hierarchy of insurance related to the various levels of service. Those with extreme experience and education basically medical, purchase malpractice insurance. Those with extensive educations and high standards of testing etc. buy professional liability insurance. The remaining groups purchase errors and omissions insurance. But basically, all of the policies within these groups are in some form or fashion a professional service protection insurance policy.
The nature of our current society is to sue when results are not as anticipated. Between 1800 and 1960, there were approximately 600 court decisions related to professional judgment. From 1960 to 1970, there were almost 200 cases in our court system. From 1970 to 1980, over 700 cases came before the state courts in our nation. This illustrates the litigious nature of our society. Errors and Omissions Insurance is a byproduct of our arguable environment.
The key to this form of insurance is that it protects the insured against claims made by a client. It primarily serves to ‘Defend’ the insured against any claims made. Most claims are filed via civil suits and at this point the insurance provider is notified. Typically the policy kicks into gear and the insurance company does what it can to defend the insured from the claim made. If unable to gain the upper hand in the lawsuit process, the insurance company will indemnify the insured. In this case, the insurance company will pay the sum up to the policy limits as agreed to between the insured and the underwriter. But in many cases, the insurance company will seek to settle and pay a reasonable claim related to the error or omission.
Factors that Impact the Policy
The primary element of the errors and omissions insurance is protecting the professional from failure to perform your ‘Duty of Care’ in the performance of your job. Naturally this is a legal concept and there are many different interpretations and legal definitions. For the insurance company, this latitude in defining this duty of care from one profession to another is broad and helps the insurance company defend the insured and limit claims.
The secondary issue most often involved is the source of the error. If you own a business, I’m sure you have staff that work for you. You have experience and so most likely the error isn’t due to you, it is due to the lack of experience related to the staff.
Then, the question becomes, what exactly is covered. Well, a lot depends on the addendums you purchase with the policy. Naturally, the more coverage you seek, the higher the price for the policy. If the policy only covers the one professional (you), it will be less expensive than a policy covering a staff of 8. The volume of exposure determines the coverage and the price for the insurance. The insurance usually covers the following:
- Actual and Claims of Negligence and the Associated Damages
- Libel and Slander and the Associated Damages
- Use of Temporary Employees or Other Professionals
- Copyright Issues
- Costs of Defending the Alleged Claim
Most policies are written to cover claims made while this carrier covers the insured. Many will not cover any claim made after the policy is terminated or expires even if is for work done while covered by the policy. This is referred to as ‘Claim Made and Reported’. The question for most of those seeking insurance is how do I cover a claim made for an issue that may have occurred prior to insurance coverage or after termination (such as retirement, project completion etc.)? This is where the insured will need to seek out ‘Tail’ coverage. Tail refers to actions taken after termination or for actions that occurred prior to purchasing this policy. Ask your agent about this critical aspect of the policy.
When you apply for a policy, most insurance underwriters want to know how you conduct your business, what is your experience and have you had any claims made in the past. The secret for you is to conduct business in accordance to your profession’s standards of conduct. A good example is that in the legal profession, they use an engagement letter or letter of understanding as to the relationship and financial agreement prior to performance of services. The key is to have a mutual understanding and this understanding is documented to a high degree. For most professions, it is a simple contract.
Finally, let’s talk about the cost of insurance. Every policy issued is custom designed to the particular practice or business. I’ve yet to see a policy less than $750 per year. For many low risk professionals, you’ll see costs between $1,200 and $2,500 per year depending on the number of staff and your particular profession. For more complex situations, the insurance can get expensive. Here are two examples:
This company provided mental health services to children and autistic adults. The company has over 70 professionals rendering these services with revenues exceeding $5,000,000 per year. The policy ran between $42,000 and $58,000 per year depending on the licensing issue. If any failures during their twice a year inspection by the state, the insurance premium would go up.
The second example relates to a nonprofit providing social care to the public. In their situation, they required tail insurance due to the 5 year liability exposure required in their contract. In their case, this entity had 14 case workers. The policy ranged from $13,500 to $18,000 per year depending on the volume of revenue generated.
It is not only the price that can cause you to roll your eyes, there is more. The next section explains some of the pitfalls related to E&O insurance.
Cautions and Issues
The devil is in the details. Most policies you purchase will not cover ‘Punitive Damages’ which include penalties and judgments handed down by governing bodies (court, licensing boards, Internal Revenue Service, and State Revenue Departments). That is why I paid my $2,000 issue that I used as an example in my opening paragraph.
Another issue that I’ve come across is the lack of understanding from the underwriter about the actual services you perform. In many situations, they don’t have a clue what you do and therefore you need to educate the underwriter about your profession. The key is to demonstrate compliance with your profession’s standards of care – ‘DUTY OF CARE’.
One caution I will offer to you. I have yet to meet an insurance agent that is well versed in this area of insurance. They really don’t seem to have an education program in their industry related to this insurance. This is most likely due to the recent growth in the number of policies issued in the last 30 years. Take your time in getting a quote, you may have to seek out another agent in order to get proper coverage.
No matter what, get several quotes and read the details in the terms sheet issued. You may choose to accept greater responsibility with a higher deductible and/or limitations on the policy to keep the cost down. Take your time and do this right. READ THE DETAILS. Act on Knowledge.
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