As a business owner, the right insurance coverage protects you from the unexpected—and mitigates some of the inherent risks associated with running your own business. If you’re a professional services provider, however, your small business insurance needs will be different than other types of businesses. Whereas a product-based business might require product liability insurance to complement their general liability policy, service-based businesses will want to consider adding an errors and omissions insurance policy.
What is errors and omissions insurance and how does it work? We’re here to explain this essential type of liability policy—breaking down coverage and costs—so that you have all the information you need to adequately protect your small business.
What Is Errors and Omissions Insurance?
Errors and omissions insurance, also called E&O insurance, or professional liability insurance, protects your business in case of lawsuits that result from mistakes made within the course of performing professional services for a client.
In other words, if you’re an accountant and you make a mistake while preparing a client’s tax return, this type of liability insurance policy would cover you if the client sued. Therefore, errors and omissions insurance covers:
- Cost of hiring an attorney to defend your business
- Associated court costs
- Administrative or other costs related to putting your defense together
- Settlements and judgments
It’s important to note that although some insurance providers may refer to this type of policy as E&O insurance and others as professional liability insurance, generally, errors and omissions insurance is the same as professional liability.
You might, however, see a variation in terminology based on industry—insurance-, real estate-, tax-, and technology professionals may be more likely to use the phrase E&O insurance—whereas consultants, engineers, architects, and accountants may be more likely to use professional liability insurance, even though the product they’re referring to is the same.
What Does Errors and Omissions Insurance Cover?
With this overview in mind, let’s break down what E&O insurance covers in more detail.
As we mentioned above, errors and omissions insurance is a form of professional liability insurance—therefore, whereas general liability insurance covers claims of bodily injury or property damage (physical claims)—E&O insurance covers errors and mistakes that might occur when you work with clients in a professional capacity.
This being said, errors and omissions insurance covers claims related to:
- Negligence (perhaps the most common E&O claim)
- Mistakes and oversights (also called errors and omissions, hence the name)
- Undelivered or inadequate services
- Missed deadlines or late work
- Inaccurate advice
- Breach of contract
- Copyright infringement
- Personal injury, like libel and slander
Typically, an E&O policy will cover your entire business—including you and your employees (and sometimes independent contractors and temporary employees)—from client or customer lawsuits related to any of these types of mistakes made during current or past services.
What Does Errors and Omissions Insurance Not Cover?
Of course, as an insurance policy designed specifically for service-based businesses, there are certain types of claims that this professional liability insurance will not cover.
Errors and omissions insurance does not cover:
- Intentional wrongdoing: If you intentionally turn in inaccurate work because you’re having a dispute with your client, you will not be covered under E&O insurance.
- Illegal actions: If you break the law in the course of your professional services for a client—for example, if you hack into a rival company’s server to steal their data—you will not be protected by your E&O policy.
- False advertising claims: If you make a claim in advertising your services that is inherently false, you will not be covered under errors and omissions insurance.
- Employee claims of illness or injury while on the job: These are covered under workers compensation insurance.
- Employee discrimination lawsuits: You’ll want to invest in employment practices liability insurance to protect your business from these types of claims.
- Third-party claims of bodily injury or property damage: These claims are covered under your general liability insurance policy.
- Damage to business property or vehicles: You’ll need a commercial property insurance policy to cover physical damages to your own property. To cover damage to company vehicles, you’ll need a commercial auto insurance policy.
Additionally, it’s important to note that although errors and omissions insurance covers you for claims against your past or future work, coverage of your past work is typically limited by the date you purchased the policy.
Therefore, if you purchase an E&O policy on January 1, 2021, any claims against the work you completed before that date will not normally be covered. If you want to cover claims from mistakes before your policy started, you’ll want to talk to your insurance provider about adding a retroactive date to your policy.
Errors and Omissions Claims Examples
With all of this information in mind, let’s walk through a few examples of claims that would be covered under an E&O policy.
First, let’s say you’re a graphic designer. A company hires you to design their new logo. You design the logo, but it turns out that the logo is extremely similar to an existing logo that you were anywhere of. If your client sues you for negligence, you would be covered under your errors and omissions insurance policy.
Similarly, let’s imagine you’re an accountant. You complete a client’s annual tax return, but accidentally input incorrect data on the final form. The client faces a penalty fee for the incorrect form from the IRS and then file a lawsuit against your business for the mistake. Again, in this case, you’d be covered by your E&O policy.
Generally, examples such as these, concerning mistakes or “negligence” are the most common types of errors and omissions claims.
Another example, however, might be if you’re an IT consultant working under contract for a marketing business. In this instance, your contract states that you must complete a site security installation by a certain date.
Unfortunately, you miss the date, but complete the work a few weeks later. Nevertheless, the client sues you for the missed deadline and breach of contract. Here, your errors and omissions coverage would also apply.
Who Needs Errors and Omissions Insurance?
As you may have gathered based on our discussion thus far, any business that performs services or gives professional advice during the course of operations should consider investing in E&O insurance coverage.
Generally, this includes businesses and business owners such as:
- Financial professionals, including accountants, bookkeepers, tax advisors, and financial consultants
- Architects, engineers, designers, and general maintenance businesses
- Advertising and marketing professionals
- Web developers, IT professionals, and programmers
- Nonprofits and cultural organizations
- Attorneys and law firms
- Real estate brokers and agents
- Insurance brokers and agents
- Doctors, dentists, and other medical offices/professionals (These businesses should specifically purchase malpractice insurance.)
- General consulting or service businesses (e.g. printing companies, event planners, graphic designers, etc.)
In fact, clients or customers may even request that you present a certificate of insurance showing your E&O policy before agreeing to work with you.
Errors and Omissions Insurance Cost
If you think your business might need E&O insurance, you’re likely wondering how much this type of coverage costs.
When it comes down to it, errors and omissions insurance can be expensive—on average, small businesses pay anywhere from $500 to $1,000 per year (about $42 to $83 per month) for this type of coverage. In fact, larger businesses may pay as much as $500 to $1,000 per employee per year.
This being said, however, compared to other types of business insurance, you’ll see that errors and omissions insurance costs will vary widely based on the size of your business, industry, and policy limits.
As you might imagine, the riskier your industry and the more likely you are to face a claim (especially an expensive one), the higher your annual premium will be for E&O coverage.
Along these lines, building designers, general contractors, and architects are more likely to see the higher end of the errors and omissions insurance cost spectrum compared to finance, accounting, or insurance professionals.
On the whole, then, the cost of your errors and omissions insurance policy will depend on:
- Business size: The larger your business, the more likely you are to see higher premiums
- Location of your business: Businesses located in large cities will see higher costs than those in more rural areas, as lawsuits are more expensive in large cities.
- Industry: As we mentioned, the more risk that’s inherent in your industry, the more likely you are to see a higher errors and omissions insurance cost.
- Revenue and contracts: If your business has contracts with multiple clients and brings in a greater amount of revenue, the more risk it poses for lawsuits, and larger ones. Therefore, you’re more likely to see costs increase for E&O coverage.
- Employee training and quality control procedures: Conversely, if your business has solid employee training processes and quality control procedures, the more likely you are to see lower premiums. These processes help mitigate your risk for a lawsuit, and thus, your insurance costs will be lower.
- Claims history: If your company has a history of being sued, this will increase the cost of your E&O policy—as the business insurance company will consider this history a larger risk.
In addition to these factors that are directly related to your business itself, there are also factors related to the individual policy that will affect the cost of errors and omissions insurance.
Errors and Omissions Coverage Limits and Deductibles
First and foremost, the amount of coverage on your E&O policy will play a role in costs. Generally, errors and omissions insurance coverage is purchased with an occurrence and an aggregate limit—written as, for example, $250,000/$500,000.
In other words, this means that the policy has an occurrence limit of $250,000—the insurance company will pay up to $250,000 to cover any single claim—and an aggregate limit of $500,000—the company will pay up to $500,000 to cover any claims during the lifetime of the policy (typically one year).
This being said, the higher the limits on your policy, the higher the cost of the policy will be. Although limits can vary from $250,000 to $2 million, you’ll typically see a $1 million/$1 million for most E&O policies.
On top of the amount of coverage, the other main policy-related factor that will affect costs is your deductible. As you may know, the deductible is the amount you have to pay before claims are covered by the insurance company. The higher your deductible, the lower your premium, and vice versa.
With all of this in mind, therefore, all there are some factors that contribute to errors and omissions insurance costs that are out of your control (e.g. industry, location, size), there are others that you can take action to lower your costs.
For example, you can implement employee training and quality control procedures, lower your policy coverage, and raise your deductible if you’re looking to save money on business insurance.
Of course, when it comes to lowering coverage and raising your deductible, it’s important to remember that these actions will put your business at a greater risk of having to pay for claims out of pocket.
How to Get Errors and Omissions Insurance Coverage
Ultimately, although errors and omissions insurance costs may be higher than other types of commercial coverage, this type of policy is going to be essential for any business providing professional services. After all, the cost of litigation against a small business can range from $3,000 to $150,000—making the cost of an insurance policy well worth the investment if you need to use it.
This being said, if you’re looking for E&O insurance, there are generally two routes you can take:
First, you can look into purchasing a straightforward errors and omissions insurance policy. Most major commercial insurance companies offer this type of coverage. Therefore, if you have an existing business insurance policy, you might start with that provider and see if they offer E&O coverage, either as a separate policy or add-on to your current policy.
If you don’t yet have business insurance, you might use an online marketplace like Insureon or Coverwallet to compare multiple quotes from top providers in one place. Of course, you can also go directly to an insurance company to purchase a policy—Hiscox and The Hartford, for example, are both well-known, reputable providers of errors and omissions insurance.
Instead of purchasing an E&O policy on its own, however, the second route you might decide to take is to purchase this coverage as part of a business owner’s policy, or BOP. Typically, BOP’s combine multiple types of business insurance—general liability-, commercial property-, business interruption coverage, etc.—into a single, more manageable, and more affordable policy.
To this point, most business insurance providers can work with you to customize your BOP, so you might consider trying to bundle errors and omissions coverage with other types of insurance you need to make your policy more affordable.
Refer to our comprehensive guide to learn more about a business owner’s policy.
The Bottom Line
At the end of the day, whether you’re a marketing agency or real estate broker, errors and omissions insurance coverage can be integral to protecting your business from claims of negligence or mistakes.
Therefore, if your business provides professional services, you should seriously consider investing in this type of insurance policy. Once again, although E&O coverage may seem expensive compared to other types of policies, it’s much less than the average cost of a lawsuit against your business.
Plus, as we’ve discussed, there are a number of strategies you can employ as an organization and during your search process to find the most affordable errors and omissions insurance for your small business.