What Is Errors and Omissions (E&O) Insurance?

What Is Errors and Omissions (E&O) Insurance?

Errors and omissions (E&O) insurance is a form of liability insurance that covers claims against your business for mistakes you make while providing a professional service. It reimburses the costs of legal fees, damages, and financial settlements related to claims of negligence, malpractice, errors, or omissions.

Understanding Errors and Omissions (E&O) Insurance

E&O insurance, which you might also hear called professional liability coverage, protects your business from client claims about errors or mistakes, faulty advice, or not providing the level of service they expected. It also handles claims if you fail to do the work, meet a deadline, or fulfill contract terms.

Let me give you an example: suppose a furniture manufacturer hires your IT consulting company to upgrade their computer-aided manufacturing software. A few months later, they sue you for $50,000, saying your advice on using the new software was inadequate, causing their machinery to malfunction and them to lose two big orders.

Your E&O policy could cover the damages or settlements from those claims. It might also pay for attorneys’ fees, court costs, and other legal expenses your insurer spends defending your business, regardless of whether the claim is valid or you're found liable.

If you do business outside the United States, make sure you get an E&O policy that applies worldwide. Steer clear of any that limit coverage to incidents in the U.S.

Who Needs E&O Insurance?

You should consider getting an E&O policy if your business involves giving advice or providing a professional service for a fee. This includes a wide range of operations, like accountants, architects, real estate agents, consultants, financial advisors, wedding planners, fitness instructors, and physical therapists.

Certain professionals might be required by state or federal law to have E&O insurance before starting business, such as attorneys, contractors, and medical professionals. You might also need it to obtain or renew a professional license or to meet client contract requirements.

What E&O Insurance Doesn’t Cover

Many E&O policies exclude claims from bodily injury or property damage, employment-related acts like wrongful termination and discrimination, fraud or criminal acts, injuries to workers, infringement of patents or other intellectual property violations, data breaches, and theft of sensitive data.

Your policy could have more exclusions, so read it carefully to know exactly what it covers and what it doesn't.

How to Choose an E&O Policy

The right E&O policy for you depends on your business type and the risks you want to cover. Many policies are tailored to specific occupations, like attorneys, accountants, or real estate agents, so ensure it fits what you do.

Some E&O policies include coverage for additional risks that apply across many fields, such as employment practices liability insurance, which handles claims from workplace violations like discrimination and wrongful termination.

With any insurance, your E&O policy balances cost against protection level—more coverage means higher premiums. Compare the per-occurrence limit, which is the max per lawsuit or claim, and the aggregate limit, the total max payout. For instance, a policy might offer $250,000 per incident up to $1 million aggregate.

When looking at costs from different insurers, ensure you're comparing the same total coverage. Check the deductible too—that's what you pay out of pocket before insurance starts, and higher deductibles mean lower premiums.

Most E&O policies are claims-made, covering claims filed during the policy term but not after it expires. Some offer occurrence policies, which cover incidents during the term no matter when the claim is filed; these are broader and cost more.

When shopping, look for a policy that covers attorneys’ fees and legal expenses on top of the policy limit. Avoid ones that count those costs against the limit.

How to Buy E&O Insurance

If you need E&O insurance, start with your general liability insurer—many that sell business insurance also offer E&O. Some can add it to your general liability or business owner’s policy through an endorsement. If not, ask your insurance agent for quotes or get them online yourself.

Costs vary by industry; a building design company will pay more than a hair salon or massage therapist. Factors like your business size, claim history, and chosen limits affect the premium. For many small businesses, it's around $735 per year.

Why Is E&O Insurance So Important?

If a client sues you for errors, mistakes, or faulty advice, your general liability policy won't cover it. These claims can get expensive, especially for small companies, and without E&O, you'd pay damages, settlements, and legal fees yourself. One big claim could end your business.

What Is an Example of E&O Insurance?

Medical malpractice insurance is a type of E&O coverage that protects doctors and other medical practitioners from patient claims of professional negligence. It covers negligence, medical errors, or accidental oversights, and some states require it for licensing.

Is E&O Insurance the Same as General Liability Coverage?

No, they're different. General liability covers claims for bodily injury or property damage on your premises, from your products, or from your operations. E&O covers client claims for mistakes or faulty advice in professional services.

The Bottom Line

Errors and omissions insurance, or E&O, protects your business from claims of negligence, faulty advice, errors, or omissions. It covers damages, settlements, and legal costs from those claims. If you or your employees provide professional advice or services for a fee, you likely need it.