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Errors and Omissions Insurance (E&O) Explained: What It Covers

Errors and omissions (E&O) insurance is a type of professional liability insurance that protects companies, their workers, and other professionals from claims of insufficient or negligent work.
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  • Errors and omissions insurance is a form of professional liability insurance.
  • E&O insurance protects businesses and professionals against claims of malpractice or negligent acts by customers.
  • Anyone who provides a service that requires E&O insurance, including financial services, insurance agents, doctors, lawyers and wedding planners.
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  • Errors and Omissions Insurance

Understanding Errors and Omissions (E&O) Insurance.

Errors and omissions insurance is a form of liability insurance. Protects companies from the full costs of a claim brought by a customer from a professional who provides advice or services such as a counselor, financial advisor, insurance agent or attorney.

Errors and omissions insurance often covers both court costs and any settlements up to the amount stated in the insurance contract. This type of liability insurance is generally required to provide professional advice or provide services. Without E&O insurance, a company could be liable for damages running into the millions, in addition to the legal team's fees. E&O insurance helps mitigate or eliminate these potential liabilities.

For example, a client may sue an advisor or broker after an investment defaults, even if the risks are known and within the guidelines set by the client. Even if a court or arbitration panel rules in favor of an investment broker or adviser, the legal fees can be very high, which is why E&O insurance is so important.

The benefits that E&O insurance provides to businesses or individuals vary greatly depending on the policy and the version of the insurance company. E&O insurance may or may not cover temporary employees, claims arising from work completed before the policy takes effect, or claims in different jurisdictions. These policies do not cover criminal prosecution and certain liabilities that may arise in civil court that are not specified in the policy.

special considerations

Insurance brokers, insurance dealers, real estate brokers, registered investment advisors, financial planners and other financial professionals can obtain E&O insurance.

Regulators such as insurance regulators, the Financial Industry Regulatory Authority (FINRA), or even corporate investors often require E&O insurance.

E&O insurance also applies to companies outside the financial industry, including non-profit organizations, general maintenance firms, contractors and engineering firms. Any company or other professional who provides a service, such as wedding planners and printers, also needs electronic insurance. Doctors, dentists and other medical professionals also get E&O insurance called malpractice insurance.

The cost of the policy depends on a number of factors, including the type of business being covered, its location and any previous claims that have been paid in the past. A person or company with a lot of litigation issues has a higher underwriting risk and will likely find E&O insurance more expensive or less favorable as a result of its terms. On average, E&O insurance can run up to about $500-$1,000 per employee per year.

An example of errors and omissions insurance

Suppose a company that hosts servers used by third parties for data is hacked by hackers who have gained access to its own information and customer data. Companies affected by the breach then sue the server hosting company for compensation for insufficient security.

The server hosting company has an E&O insurance policy and reviews it to see what the policy does and does not cover. To the company's benefit, its errors and omissions policy is strong and covers such situations. The insurance company pays the legal costs associated with a lawsuit against multiple companies. It also pays monetary damages awarded by the courts or settled in arbitration.

Errors and omissions coverage helps a company avoid a major financial hit—even bankruptcy—depending on the company's finances. If you or your employees work in career counseling or other professional services, E&O insurance may be of interest to you.

Who needs error and omission insurance?

Professionals working in financial industries such as insurance, investment, real estate and accounting will benefit from E&O insurance to cover them in the event of an error or omission on behalf of a client, which can be costly.