You have invested your time and money (and sweat and blood as well!) Into building your company and reaching the position you are in now, right? But, at the back of your mind, you know that things can go wrong, despite your best and untiring efforts. Yes, mistakes do happen, and unfortunately, they can lead to costly legal disputes at times, derailing your hard-earned ‘journey’ of success.
That's why every business needs Errors & Omissions insurance (E&O insurance, in short) as it protects the business from liability claims arising from errors or omissions made during the normal course of operations. In this blog post, we will explore why having E&O insurance is crucial for protecting your business from unexpected risks and how it can help you safeguard against financial losses.
Let’s start with the basics then!
What is Errors & Omissions Insurance?
Errors and omissions insurance (also known as "E&O insurance" or "Professional Indemnity Insurance") is a type of liability insurance that protects businesses and professionals from negligence claims.
It protects companies and professionals (such as a consultant, insurance agent, financial advisor or lawyer) from the expenses related to a client's claim, arising from mistakes/omissions made while providing services/offerings. It is common for a company to obtain E&O insurance if it provides services to customers for a fee.
E&O insurance, in general, comes handy in the events of claims related to:
- Mistakes, errors or oversights that may occur while working.
- Not meeting a specific standard of care, particularly one earmarked by a specific profession.
- Failure to meet a deadline or provide a promised service to a customer
- Contract violation.
- Professional negligence.
What is Included in Errors & Omissions Insurance Policy?
The following covers are included in the E&O Insurance -
- Defamation (Libel & Slander)
False statements about a person, place, or thing that adversely affect the reputation of that person, place, or thing constitute a tort, or a crime is Defamation. E&O insurance covers the loss, the insured is legally liable to pay with respect to a claim alleging defamation, libel, and slander, in the performance of professional services. It can help cover the costs of legal fees, settlements, or judgments that may arise from a defamation lawsuit. There are 2 types of defamation - Libel and Slander.
While libel involves publishing a false and defamatory statement in a permanent form, slander involves making a false and defamatory statement orally or in some other form.
2. Breach of confidentiality
It covers the loss incurred by the insured in case of a claim or lawsuit related to an alleged breach of confidentiality. Here, confidentiality refers to the protection of sensitive or private information. It can help cover the costs of legal fees, settlements, or judgments that may arise from such claims or lawsuits.
For example, if a business has a confidentiality agreement with a client and an employee of the business accidentally releases sensitive information about that client, the policy would cover the financial losses arising from the lawsuit filed by the client in relation to that breach of confidentiality.
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3. Dishonesty of employee
This coverage, also known as employee fraud coverage, provides protection for a business from third-party claims in case an employee of the business commits fraud or dishonest acts and it leads to third-party loss. It can help cover the costs of investigations and legal fees, as well as any lost income or damages caused by the employee's actions.
For example, if an employee of a business steals money from the company or submits fake documents, then this coverage would provide protection for the business in case of financial loss to a third party as a result of that employee's actions.
4. Automatic subsidiary coverage
It automatically includes subsidiaries newly created or acquired (during the policy period) by the insured, under the main policy, without the need for additional paperwork. However, at the start of the policy period and at the time of loss, the insured must declare that it controls, directly or indirectly, more than 50% of the interests entitled to vote in the election of the governing body of such a subsidiary organization.
5. Extended reporting period
If the policy is terminated or not renewed (for reasons other than termination by the insurer for non-payment of premium) and no event has occurred, the insured is granted an extended period to discover and report any claim. However, such claims should be for wrongful acts occurring prior to policy expiry but may have been discovered later, the effective date of termination or non-renewal. Usually, no additional charge is levied for such an extension of up to 90 days.
6. Court Attendance Fee
It covers the loss incurred by the insured while attending the court in relation to an errors & omissions lawsuit filed against him. Such costs may include lawyer's fees, travel expenses, and lost wages. For example, if a business is required to attend court for a deposition or trial, the costs associated with travel, lodging, and lost wages, allow the business to focus on defending itself in court.
7. Mitigation Costs
"Mitigation Costs" coverage protects a business against the costs associated with taking steps to reduce or prevent further damage or loss. It can help cover the costs of repairs, replacement, and other expenses incurred to mitigate the damage caused by an error or oversight.
For example, if a business makes a mistake that causes damage to a client's property, this coverage would provide protection for the business in case of costs associated with repairing or replacing the damaged property.
8. Legal Representation Costs
It provides protection against the potential high costs of legal representation, in case the insured business is involved in a lawsuit and needs to hire a lawyer to represent them. This can include things like hiring a lawyer to represent the business in court or in negotiations with regulators, as well as the cost of any settlements or judgments.
For example, if a client has filed a lawsuit against an insured business for an alleged act of error & omission, this coverage would help cover the costs associated with hiring a lawyer to represent the business in court or in negotiations with the regulators.
9. Loss of documents
It indemnifies the loss incurred by the insured in case of a claim or lawsuit related to an alleged loss or destruction of important documents of any nature. It can help cover the costs of replacing or recreating lost documents, as well as any legal fees or settlements that may arise from the loss of those documents.
For example, if a business's office is damaged by a fire and important documents are destroyed, this coverage would provide protection for the business in case of any financial loss or liability that may arise from the loss of those documents.
10. Professional Enquiry extension
This coverage indemnifies the loss incurred by the insured in case of an investigation or inquiry by a professional regulatory body, such as an industry association or government agency. It can help cover the costs of legal fees, settlements, fines, or judgments that may arise from such an investigation.
For example, if a business is being investigated by an industry association for a potential violation of professional standards, this coverage would provide protection for the business in case of legal costs or fines that may arise from the investigation.
11. All existing subsidiaries & step subsidiaries located anywhere in the world should be covered on a worldwide basis
This policy will cover the business and its subsidiaries, no matter where they are located in the world. "All existing subsidiaries & step subsidiaries" here means that any subsidiary companies that the business currently owns, as well as any subsidiary companies that those subsidiary companies own, will also be covered under the policy. However, a subsidiary shall mean any entity in which the policyholder holds directly or indirectly (through another Subsidiary) more than 50% of the voting rights.
For example, if a business has a subsidiary company in Germany and that subsidiary company has another subsidiary company in France, both of those companies will be covered under the policy, even though they are in different countries.
12. Additional Insured wherever mandated by Contract and requested by the insured
It specifies that the policy will cover any additional parties that are required by the contract to be insured or that the insured party requests to be added to the policy- in case of any errors or oversights made by the insured party.
For example, if a business enters into a contract with another company and the contract requires that the other company be added as an "additional insured" on the business's Errors & Omissions policy, this coverage would ensure that the other company is protected under the policy. Additionally, if the business requests that another party be added as an "additional insured" on the policy, this coverage would allow for that request to be granted.
13. Cover for Dishonesty committed by employees on a contract, trainees/secondees/ interns/project assistants.
It provides protection for a business in case an employee, who is not a permanent employee of the company, commits fraud or dishonest acts. This coverage is designed to cover the loss resulting from dishonest acts by employees on a contract basis, trainees, interns, project assistants, or employees who are seconded to the business by another company. These employees may not be covered under a traditional "Dishonesty of employee" coverage.
For example, if a business hires a contractor, who embezzled money from the company or falsifies documents, this coverage would provide protection for the business in case of financial loss as a result of that employee's actions.
14. Intellectual Property Rights (Excluding Patent Trade Secret)
It provides protection for a business in case of a claim or lawsuit related to an infringement of any intellectual property right of any Third Party, other than patents and Trade Secrets. It can help cover the costs of legal fees, settlements, or judgments that may arise from such claims or lawsuits.
For example, if a business is accused of using a copyrighted image without permission, this coverage would provide protection for the business in case of a lawsuit related to that claim.
15. Certificate of Insurance, wherever required by Contract and requested by the insured
When a business has this type of coverage, it can have a certificate of insurance that verifies that it has Errors & Omissions insurance in place and can provide the same to its clients or partners, whenever it is required by contract. This coverage allows businesses to fulfill contractual requirements
For example, if a business has a contract with a client that requires the business to provide a certificate of insurance, this coverage would allow the business to provide the certificate to the client, verifying that the business has Errors & Omissions insurance in place.
16. Outgoing Principal Extension
This clause specifies that the policy will provide protection for a business in case of potential errors or oversights made by an outgoing principal or key employee after they have left the company. It would cover potential losses or damages that may arise from the actions of such employees and help cover the costs of legal fees, settlements, or judgments that may arise from claims or lawsuits resulting from such acts.
For example, if an employee who was responsible for a particular project leaves the company and the project subsequently runs into problems or causes a loss, this coverage would provide protection for the business in case of any legal costs or damages that may arise from the outgoing employee's actions.
What is Not Included in Errors & Omissions Insurance
- Cyber Threats: You must purchase cyber insurance separately to cover claims resulting from cyber risks, such as data breaches and cyber-attacks.
- Bodily Injury to Third Parties: You are not covered under this policy if you cause injury to a third party while providing business services.
- Directors & Officers (D&O) Claims: The policy does not cover claims associated with breaches of fiduciary duty, mismanagement, or any other wrongful acts committed by members of your company's board of directors. Directors & Officers (D&O) insurance is recommended to protect against such claims.
- Employee Illness or Injury: The policy does not cover claims arising from injuries or illnesses sustained by employees. Instead, a Workers' Compensation policy might be needed.
- Fines & Contractual Penalties: The policy excludes claims arising from fines, penalties imposed by a court or governmental agency, as well as claims arising from contractual breaches or negligence.
- Malicious Acts & Intentional Wrongdoing: In the event that you do something wrong or harmful on purpose, this insurance won't cover your losses or damages. If you intentionally misrepresent something important (called "intentional misrepresentation"), steal something (called "theft"), or cheat in some way (called "fraud"), and these actions cause harm or loss, the insurance will not cover it. You must be aware of these exclusions in order to ensure your coverage matches your specific needs and risks. Intentional or malicious acts are actions you did on purpose with the intent of causing harm to another person.
E&O Insurance: Who Needs It?
An error and omissions insurance policy is generally a requirement for businesses providing professional advice or services to customers. Unless an organisation has E&O insurance, it may be held liable for millions in damages as well as in the legal fees involved.
Brokers, dealers, realtors, investment advisors, financial planners, and other financial professionals can obtain E&O insurance. E&O insurance will often be required by regulatory bodies, such as insurance regulators, FINRA, and even investors. Businesses outside the financial sector (including non-profits, contractors, and engineering firms) can also obtain E&O insurance.
E&O Insurance is also necessary for companies that provide services, such as wedding planners and printers. Doctors, dentists, and other medical professionals also carry E&O insurance coverages, often termed malpractice insurance.
Even if the risks of an investment were well known and within the guidelines established by the client, a client may sue an advisor or broker if the investment flops. The legal fees can be very high even when an investment advisor or broker wins a court or arbitration panel. This also states why E&O insurance is important.
Importance of Errors & Omissions Insurance for Technology Companies
In today's world, most businesses are run by technology. If there is an issue with the technology being used, the operations of the concerned business may come to a halt, damaging the business financially. If you are a provider of that technology, you could be sued to compensate for the said damage. Traditional liability policies will not cover such financial losses, which is why errors and omissions insurance can become extremely useful for technology providers and IT professionals.
This coverage may protect technology providers and IT professionals in situations such as.
- Certain glitches appear during the installation of software you sold to a client. It leads to your client losing a month's worth of billing.
- During the 48 hours following the installation of your equipment, your customer could not place orders online.
- The cloud-based data services you provided failed to back up the critical data that can't be retrieved by a customer anymore.
- A website you designed for a customer resembled that of a key competitor
E&O Insurance Example
Assume a company that hosts data servers for use by third parties. One such server is breached by hackers who gain access to confidential information and client data. The parties affected then sue the server-hosting firm for damages because of insufficient security.
The server-hosting company has an E&O insurance policy that reviews what it covers and what it does not cover. To the company's advantage, its errors and omissions policy is comprehensive and covers such scenarios. The insurance covers the legal costs associated with the lawsuit. It also covers any monetary damages awarded by the courts or agreed upon in arbitration.
The Bottom Line
E&O insurance ensures that freight forwarders are protected from the costs of mistakes or negligence on their part, which can be incredibly expensive if left unprotected. We hope from the discussion above, you have got a fair idea of what Errors & Omissions insurance is and how it can help your business. For the best recommendation on Errors & Omissions insurance policies, you may contact BimaKavach. Here, you can get the best recommendation for any insurance product in just 5 minutes.
Frequently Asked Questions ( FAQs)
- Who all needs Errors & Omissions Insurance in India?
An error and omissions insurance policy is generally a requirement for businesses providing professional advice or services to customers. This policy can protect those in financial industries like insurance, investments, real estate, and accounting against costly mistakes or omissions made while providing a service. E&O Insurance is also necessary for companies that provide services, such as wedding planners and printers. Doctors, dentists, and other medical professionals also carry E&O insurance coverages, often termed malpractice insurance. Employers and independent agents are mandated by many regulatory bodies to provide their employees with the cover of E&O insurance.
2. Do E&O and liability insurance cover the same things?
A company's errors and omissions professional liability insurance covers mistakes and protects companies and professionals (such as a consultant, insurance agents, financial advisors, or lawyers) from the expenses related to a client's claim, arising from mistakes/ omissions made while providing services/offerings. The company's general liability insurance covers claims of bodily injuries or damages caused to third parties, as a result of its normal business operations.
