Things You Need To Know About Errors And Omissions Insurance

Errors and omissions insurance. Doesn’t sound very exciting, does it? Not exciting, that is, until you need it. Or, worse, until you need it only to find you don’t have it.

If that happens to you or your company, you’ll probably experience more excitement than you can stand. Although this type of insurance has been around for several decades, many risk managers and independent contractors alike are still unsure of what errors and omissions insurance does (and does not) cover, or if it’s something their business needs.

Much of the focus on errors and omissions (commonly referred to as “E&O”) insurance has centered on the tech industry, and for good reason. Our world doesn’t so much revolve around technology as it revolves because of it. If you’re in the tech industry, you already know how true this is. Even if you’re not, however, you probably don’t need to think too hard to come up with examples of how important technology (IT, social media marketing, your manufacturing machinery, data storage, etc.) is to your enterprise.

With luck, you’ll never discover how costly a tech failure can be and how it can threaten the very survival of your business and if you have errors and omissions insurance coverage, you may never have to.

Here are some of the important things you need to know about errors and omissions insurance coverage:

Why You Need It

If you’re an independent software developer or programmer, you would be foolish not to obtain errors and omissions coverage. Not to be dramatic, but one claim could wipe you out.

Even if your work is performed entirely as an independent contractor under another entity, a plaintiff will probably sue everyone involved and let the court sort out the party ultimately responsible.

What It Covers

Errors and omissions coverage applies to the performance of your employees and independent contractors, your software and your hardware (for example, if you provide off-site storage on your servers).

It is applied to loss caused by a wide variety of factors, the most common of which are:

•    Corruption to or loss of computer data

•    Product recall

If one of your products is defective to the extent that it requires a market-wide recall, you’ll be glad that you have a product recall endorsement or separate policy.

•    Product failure

If a company product fails to perform as designed/promised resulting in loss to your customer, you can be fairly certain that the customer will be coming after you for recovery.

•    Human error

Perhaps the harm to your client was the result of a simple programming or data entry error by one of your employees. Or, maybe a member of your staff incorrectly trained your customer/client on how to implement or use your latest software update. The loss might be caused because a contractor you hired cut corners when installing a new program. Regardless of the reason, errors and omission insurance coverage can protect you from what could be catastrophic financial loss.

•    Over-promising/Under-delivering

In an effort to succeed, we all aim to please. Unfortunately, in doing so, many of us will offer what we think the client wants to hear, regardless of whether or not we can deliver the product, service or level of performance promised. If what the client receives isn’t what they expected, you can be pretty well assured that they will sue you.

NOTE: You can usually avoid this outcome if your business takes the time to train personnel on how to manage your customers’ expectations. Managing expectations reduces the risk of disappointment.

What It Doesn’t Cover

Errors and omissions insurance does not cover:

• Bodily injury

• Property Damage

• Disputes about intellectual property

• Obligations under warranty

• Breach of contract (including cost guarantees)

• Fraud/other act of dishonesty

• Coverage for loss caused by these factors is provided by commercial general liability (GL) policies. 

Helpful Tips

When shopping for errors and omissions insurance coverage, consider the following before deciding on a provider:

• Be sure that you/your risk manager understands the differences between GL and E&O policies.

• Although errors and omissions insurance coverage is readily available, prudence dictates that you choose a provider that not only understands your industry, but your company’s culture and needs as well. Does the insurer have experience with the types of exposure you are likely to encounter?

• Utilizing the same carrier for both your GL and E&O policies reduces the possibility of gaps in coverage between the two types of insurance and ensures that there is no dispute between carriers about which policy is in effect when a claim is filed. Even if an event triggers both policies, you’ll know that the loss will ultimately be covered.

There are other need-to-know details about errors and omissions insurance coverage and why you need it. You may be tempted, in the interests of reducing costs, to operate your business without it. We highly recommend you don’t. A comprehensive errors and omissions policy can provide protection against potential catastrophic loss even a single incident can cause. Is short-term cost savings worth the risk of significant long-term damage to your enterprise? If you’re involved with the risk management of your company, you know the answer to that question. You owe it to your business (not to mention your own peace of mind) to speak to a qualified insurance professional about what errors and omissions insurance coverage is right for you.