E&O Coverage: Do You Need It?

Errors and omissions insurance is coverage for service providers for things they do negligently or fail to do but should. For doctors, lawyers, and accountants, it's commonly referred to as malpractice insurance or professional liability coverage. But you don't have to be in a trade to have E&O coverage.

Who needs it?
Just about any small business person who provides service or gives advice may want E&O coverage to provide a financial backstop for mistakes that get made. Service providers and advisors can include web designers, PR agencies, wedding planners, business coaches, and others who deal with customers, clients, and patients. The insurance can be purchased by the business or by the individual service provider.

In some cases, the customer or client will require that you have E&O insurance in place as a condition for a project.

What does it cover?
As the terms "errors" and "omissions" imply, the policy covers you for mistakes that you make or for actions you fail to take but should have.

It typically includes legal representation by the insurance company. You can choose to pay your own attorneys or rely on those from the insurance company. Insurance company lawyers have a big interest in defending you because they are protecting the company's interests at the same time.

The policy probably won't cover punitive damages that can be assessed for intentional acts or gross errors. It may or may not cover actions that occurred prior to underwriting; it depends on the insurer.

What does it cost?
Horror stories about the exorbitant premiums for doctors' malpractice insurance may scare off other service providers from even considering E&O coverage. Don't let this happen to you if you might need the coverage.

There is no "standard" price. Each policy is underwritten with the risks for your situation in mind. Disclose your business operations to a knowledgeable insurance agent who can help you obtain affordable coverage. Take steps that can reduce your premiums (because your risks are minimized) by using written contracts to spell out your obligations and other controls to ensure that dates are met and other contract details will be satisfied. Ask whether premiums can be paid monthly to help you with cash flow.

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