What Is Errors & Omissions (E&O) Insurance?
Errors and Omissions Insurance plan is a type of professional liability insurance that helps the companies to protect themselves, their workers, and other professionals who are related to it from claims if a client sues for negligent acts, errors, or omissions committed during business activities that result in a financial loss. This type of loss is not usually covered by a traditional liability insurance policy. It is a very useful insurance for those who provide service that requires E&O insurance, including financial services, insurance agents, doctors, lawyers, and wedding planners.
However, it is to be noted that this insurance does not cover or protect the insured person from criminal activities. The cost of Errors and Omissions Insurance varies from one company to another, depending on the size of the company and its risk threats. Though it is less popular insurance, it is immensely helpful for the companies or the company owners to safeguard themselves and their subsidiaries from huge financial losses.
Benefits of Errors & Omissions Insurance
This type of insurance plan has come up with a sack full of benefits and inclusions that can safeguard a company from typical liabilities. The followings are the mentions.
This plan offers the insured persons a wide array of covers ranging from paying the attorney fees for defending the business in court, covering the decision of a court or judge, compensating business defense case court costs, to covering the cost of settling a plaintiff’s claims out of court, and many more. It also offers coverage for the misuse of confidential information.
Errors, mistakes, oversights, and professional negligence incurred during the course of work can cost a huge chunk of money, putting a financial burden on the company owner. But with this insurance plan, one can avoid the financial burden as it provides coverage against the lawsuit that is filed by a third party.
Peace of Mind:
If any mistake is done by the employee of the company, the owner of the company has to take liability for that. But if the owner has this insurance coverage with him/her, it protects the company and its employees from this kind of liability. Therefore, the company owner can live in peace and the workflow remains smooth.
Breach of Contract:
Breach of a written contract is considered a vital flaw in the business industry. But if this breach of law happens unintentionally by the employee, or even if any kind of misinterpretation of any service happens by the employee, this insurance plan pitches to safeguard the company.
This insurance plan can be curtailed as per the business’s and company’s needs and size. one can include additional covers to strengthen the insurance’s potential. It is a customer-centric product made for consumers’ specific needs.
How Does E&O Insurance protect your Business?
This insurance product helps the company owner protect his/her business from different types of third party liability risks that are not usually covered by regular liability insurance. One can get help from Errors and Omissions Insurance in the following ways.
- In case of defamation, this plan provides coverage.
- If a defamation lawsuit is lodged against the company, this insurance plan kicks in and protects the company.
- If the company delivers a defective material unintentionally to the buyer, and the buyer chooses to take legal action against the company, this insurance plan helps the company owner to protect it.
- In case of infringement of any intellectual property right, copyright, trade dress, trade mark or an act of passing-off or moral rights, this insurance plan will be there to protect the company.
- Failure to meet a specific standard of care, especially if outlined by a given profession, professional negligence will be covered by this insurance product.
- If a company fails to meet a deadline or deliver a specific service promised to a customer, and the customer takes legal action against it, the Errors and Omissions Insurance plan kicks in and compensate for that.
- In case of an employee forgets to give any important information to the customer or misinterprets any service that leads to loss or damage to the customer, that is also included under this insurance.
- The fees of the lawyer, the judgment of the court, the business defense court case costs, etc., will also be covered by the policy.
- If the case is over, and the owner of the company has to pay for the error, this insurance plan also provides coverage for that. Out-of-court settlements are also taken care of by this insurance product.
Who Needs Errors & Omissions Insurance?
If an individual is in the business of providing services to consumers for a fee, he/she needs Error and Omissions Insurance Plan. This Insurance policy can be customized as per the size and kind of the business or the company. this type of insurance product covers the business owner, salaried and hourly employees of the company, and any subcontractors working on behalf of the business. The policy is typically provided to the following business personnel.
- Printers and building trades contractors, such as electricians, plumbers, HVAC installers, and sheet metal workers.
- Information Technology Companies
- Call Centres, Business Process Outsourcing Companies
- Financial Institutions
- Media Companies
- Law Firms
- Other Professionals
What Are The Exclusions of Errors & Omissions Insurance?
Though this insurance product has come up with many benefits and facilities, it also has the following exclusions for which it does not provide any coverage.
- If an employee or organization breaks the law(s) intentionally, and if it is proven, the insurer will not provide any compensation for that.
- If there are any bodily injuries or property damages during the operations, the insurance company does not take any liability for that.
- If an employee or stakeholder feels seek or sustains any injury during the course of time, the policy will not cover that.
- If any third party sustains injuries or loss or files a lawsuit arising out of discrimination or harassment at the workplace, that is also not covered by the Errors and Omissions Insurance Policy.
- If anyone gets stuck in any kind of illegal activity, this policy will not be there to cover the loss.
- This policy will not cover any director’s or officer’s personal liability of the company insured.
- Fines and contractual liabilities will also fall under the category of exclusions.
- Claims occurring prior to the inception of the policy will be permanently excluded from the policy.
Understanding Errors & Omissions Insurance with an example
To make the policy more understandable, here is an example.
Mr. Sharma is a company owner and he uses the software of a third party to manage the data of his clients. But somehow, the server gets attacked by malware and it is hacked. As a result, the hackers gain access to all proprietary information and data of the clients. Now, one of the clients is taking legal action to sue the company of Mr. Sharma for inadequate security. Naturally, as an owner of the company, Mr. Sharma will be in trouble. Not only will the situation give rise to legal complexities, but also it will put a heavy financial burden on his shoulder.
But, if Mr. Sharma has an Errors and Omissions Insurance Plan with enough coverage, he will be saved. This type of insurance plan is designed to handle this kind of situation and give strong coverage against these situations. The company of Mr. Sharma will not only get compensation for the expenses arising out of the court case but also for any financial damage(s) that is done by the court or settled in arbitrations.
Errors and Omissions Insurance Cost
It is often thought that Errors and Omissions Insurance policy is costly. It is true that it is costlier than any other traditional third party liability insurance policy because of its features and robust nature. But, the premium amount of this policy depends on various factors and differs from one insurer to another, one company to another. The important factors that impact the company’s premium amount are as follows.
- The size of the company:– If the company is big and has more employees, it certainly needs stronger protection than a small-scale business.
- The nature of the company:– If the company deals with risky affairs or different types of matters, it needs more coverage than others. Therefore, automatically, the insurance price rises.
- Benefits Opted:– As Errors and Omissions Insurance Plan can be customized as per the needs of the business, therefore, if a policy-seeker opts for wider benefits and coverage, he/she has to pay a higher premium amount to avail of the benefits and facilities.
- Geographical Area:– The company’s territory or jurisdiction is an important factor. If it is a hilly or accident-prone area, the premium charge tends to be higher. Similarly, if the company is international, the policy will demand a higher premium amount to provide adequate coverage.
- Others:- It also depends on the claim history, sum insured, and opted additional covers.
Claim Process of Errors and Omissions Insurance
To raise a claim under this type of insurance plan, one needs to follow the below general steps.
- Inform the insurance company as soon as any of your clients files a case against you.
- The insurer will inform the insured person about the required documents. Submit those necessary documents along with the duly filled and signed claim form.
- After that, an inspector will be sent on behalf of the company to survey the situation, and everything related to it.
- If no discrepancy is found, and that cover falls under the category of inclusions of the policy, the company will provide the cover for the expenses incurred due to that particular situation.
Frequently Asked Questions
Here are some of the frequently asked questions that you must know.
This insurance policy is designed to offer coverage against claims arising out of errors and professional negligence. Therefore, it does not provide any coverage against coronavirus.
You can reduce the premium amount for this policy in different ways, such as:
- By reducing the sum insured amount
- By limiting your area to India only
- By reducing the AOA-AOY ratio
- Increasing the excess amount
A tail coverage for Errors and Omissions Insurance plan is also known as an extended reporting period. This facility helps the insured person to file a claim even after the professional liability insurance has expired within the stipulated period. This period is generally 30 days.
There is no fixed discount chart for not filing a claim during a whole policy year. However, insurance companies do consider this as an important factor while pricing for the next year. Again, it totally depends on other factors that are subject to the terms and conditions of the policy and the insurer.
If the AOA-AOY ratio is 1:1, this insurance policy will cover the claim up to the full limit of indemnity.
Yes, this insurance policy covers worldwide coverage, including the USA and Canada.
Yes, Errors and Omissions Insurance is the same as professional liability insurance. However, E&O insurance is different from general liability insurance. E&O is coverage specific to mistakes performed specific to the operations of a business, while general liability insurance is more suited towards coverage for a company involving claims for bodily injuries or damages inflicted by the company’s products.
The popular insurance companies that offer this insurance policy in India are – HDFC Ergo, TATA AIG, ICICI Lombard, New India Assurance, Oriental Insurance, United India and National Insurance Company, etc.
As per the record, in order of frequency of claims, the top five commercial lines E & O claims in 2020 were – commercial general liability, commercial property, professional liability, auto and business owner policies.
If you or your company offers services to the clients, you should go for this E & O insurance as failure to provide promised service or to perform professional duty can bring legal and financial hazards. In that case, this insurance policy becomes saviour.
No, punitive fines, penalties or damages are not covered by this policy.
Usually the insurers help to settle the claim smoothly within stipulated time. However, it totally depends on the nature of the claim, company policy and other factors.