Is It an Error Not to Have Errors & Omissions Coverage?

Dave Thomas

December 07, 2012


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If you have a small business and have to ask yourself if you need Errors & Omissions coverage, you already may be in trouble.

Whether your small business is a one-person show or has a number of employees, you want to make sure it and you are properly insured should something go wrong. With the right E&O (also known as professional liability insurance) plan in place, you can avert any such problems.

So, what are some scenarios where your small business may find itself in need of such coverage? The possibilities include:

1. You are doing work on someone’s computer or a project they will later install/download on their machine. As a result, the machine suffers major damage and will temporarily shut down the client’s business. In doing so, they have an interruption of business and lose money;

2. You do work in someone’s home and do damage to their property, be it you or one of your employees. There is a good chance that they may seek legal recourse to rectify the problem and cover damages. Without proper coverage, your legal costs alone could have a major impact on your company;

3. You are required to ship an order to a customer. During that transportation, the item or items suffer damage, meaning it has a negative impact on the client, be it for their business and/or financially. They could turn around and sue you and your business, causing you major financial headaches.

As you look to determine what it will cost you to put in play E&O coverage, note: The type of professional services made available, the local where such services will be offered, how much your small business takes in for yearly revenue, a detailed history for your small business when it comes to loss and claims history, and lastly where your business is located, as some states are costlier than others when it comes to insurance rates.

According to benchmarking data from Marsh, overall E&O liability insurance rates slowly moved upward in Q2 of this year, with additional programs witnessing increases rather than decreases at renewal.

Underlying the gains was a jump in both the frequency and severity of E&O claims, especially cyber claims. As claims and the potential for losses have come to the forefront, insurers have put upward pressure on rates; however, sufficient competition was an option in the second quarter to moderate the increases.

Looking at all E&O lines, capacity stayed stable and was sufficient to meet insureds’ demands.

Rate changes for E&O program renewals in Q2 generally averaged between plus and minus 5%. Despite this slight firming, pricing for most E&O liability insurance remained relatively stable over the last year.

Do I Have Options Besides E&O Coverage?

So, now that you have a better idea of what E&O is about, do you understand why your business likely needs it?

If you decide to steer clear of such coverage, there is the possibility of putting together a client arrangement that offers you protection, thereby putting the risk on the client. Should you consider this, it is wise to have an attorney go over the agreement so you do not find a loophole or two that could land you in financial trouble should something go wrong.

Also, take note that a large number of small business owners acquire greater limits for their E&O coverage, a reason due to the fact their client contracts necessitate it.

At the time that contract expires, should you decrease your professional liability policy limits? Keep in mind that if the coverage is decreased, the claim is handled around the amount of protection that was in play when the claim is filed, not how much was there when the work was done.

Finally, many small businesses will employ temp workers or freelance employees, so how does E&O coverage impact their contributions to the team?

Insurers can offer coverage not only for you and your W2 employees, but also to protect you for that work undertaken by your independent contractors. It is important to note, however, that the coverage does not always directly protect the freelance worker; they should find coverage on their own to protect any work they do.

In a day and age when lawsuits are more the norm than the occasional, having the right E&O coverage in place for you and your small business would seem to be a given.