Owning a small business is a goal for lots of entrepreneurial-minded individuals, and many Millennials and Gen Zers have taken the plunge.
Being a business owner has big perks, but it also means you’re on the hook when things go wrong. Even the most risk-averse businesses can face legal issues.
The best way to combat potential liabilities is to invest in business insurance. There are lots of different types of business insurance, but today, I’m going to focus specifically on errors and omissions (E&O) insurance.
Let’s look at what E&O insurance is, what it covers (and doesn’t), how much it costs, and finally, where you can get it.
What is errors and omissions insurance?
If you’ve never heard the term “errors and omissions,” you’re not alone. I’ll start by defining E&O insurance in plain English:
Essentially, E&O insurance is an insurance policy that covers your business against accusations of professional negligence, work oversights, and as the name suggests, errors.
E&O insurance is also called professional liability insurance, and the two terms are used interchangeably. When you’re shopping for business insurance, you might come across either E&O insurance or professional liability insurance. Just know they’re the exact same thing and have the same coverages.
How does E&O insurance work?
E&O insurance works like any other insurance policy. If a client sues your business for a covered incident and you are forced to go to court, your insurance will help pay for the costs.
When you file a claim with your insurance company, you’ll probably be given lots of paperwork to fill out, and you’ll be asked to provide documentation that details the allegations against your business. Usually, you get assigned a dedicated claim representative who handles the claim and calculates your payout.
If your insurance company determines that the lawsuit is covered based on the conditions of your policy, you’ll receive a check for your court costs, lawyer fees, and settlements, minus your deductible. Keep in mind that you will only receive compensation up to your policy’s limit.
What does E&O insurance cover?
So, what does E&O insurance cover? Well, this policy is pretty comprehensive. As I mentioned, its main purpose is to cover your company’s legal fees in the event that your business gets sued by a client or customer for professional errors.
Some of the common claims that would be covered by an E&O insurance policy
- Professional negligence.
- Work errors.
- Poor business advice.
- Breach of contract.
- Undelivered services.
- Missed deadlines.
If a client decides to sue your business due to one of the incidents listed above, your E&O insurance policy will help pay for your lawyer fees, court costs, judgments, and a settlement with the client if you’re found responsible.
Let’s say you own a marketing consulting company and you create a PR campaign for one of your biggest clients. Once the campaign launches, the client faces a lot of backlash from customers, and sues your company for their brand damage, alleging poor business advice. In this case, your E&O insurance would pay for all of your legal costs, plus a settlement with your client if you are found responsible.
It’s a claims-made policy
One of the most important things to know about E&O insurance is that it’s a claims-made policy. That means you are only covered for incidents and claims that occur while your policy is in force. So, for instance, if you purchased E&O insurance in July and a client sued your business over an incident that occurred back in March, your insurance wouldn’t cover the claim.
E&O will cover your legal fees whether you win or lose
I also want to note that E&O insurance will cover your legal fees whether you win the lawsuit or not. If your business is found guilty of the accusation, your insurance company still agrees to step in and help pay for your court costs and a settlement with the third-party.
What E&O insurance doesn’t cover
Although E&O insurance covers many of the most common claims that small businesses face, it doesn’t protect your business against everything.
Some of the situations that an E&O insurance policy will not cover, include:
- Employee claims.
- Bodily injury lawsuits.
- Property damage lawsuits.
- Employee fraud.
- False advertising.
- Copyright infringement.
To protect your business against these types of claims, I recommend checking out general liability insurance and workers’ compensation, which usually includes employment practices liability coverage. Having a comprehensive business insurance portfolio lowers your risk as a business owner in the event of actual or alleged accusations from clients and customers.
Who should get errors and omissions insurance?
I’ve met a lot of business owners who think that their company is risk-proof. They have great customers, they trust their employees, and they’ve never had any issues in the past. The truth is, owning a business is inherently risky. Your track record doesn’t really matter.
Because of that, I strongly believe that most business owners can benefit from having E&O insurance, particularly if you provide services or give advice to clients. That means everyone from accountants, to web developers, to hair salon owners, to engineers, to real estate agents should consider investing in E&O insurance.
The only business owners who may not benefit as much from E&O insurance are individuals whose business involves physical products or manufacturing, like dropshippers. As an alternative, business owners in this space should look into product liability insurance to cover faulty goods, defects, and lawsuits related to injuries or illnesses caused by a product.
How much E&O insurance do I need?
Every business has different insurance needs, and the same goes for E&O insurance. Ultimately, the amount of E&O insurance you should get depends on your unique needs, how much risk you’re willing to take, and what you could lose personally if your business got tied up in a costly lawsuit.
Keep in mind that, unlike home or auto insurance, business insurance policies typically come with high coverage limits by default. Insurance companies know that lawsuits can be expensive, so it’s common to find policies with up to $1 million in coverage and higher.
You can customize your own limit based on your needs
One of the main differences between personal insurance and business insurance is that the latter usually has two limits—a per-occurrence limit and an aggregate limit. The per-occurrence limit is the highest payout that your insurance company will provide after a single claim. An aggregate limit is the maximum amount of money your insurance company will give you for every claim you file in a given year.
E&O insurance coverage limits are customizable, so you can choose an appropriate per-occurrence and aggregate limit when you purchase a policy. Aggregate limits are often double the per-occurrence limit, but again, the specific limit is up to you.
It’s better to go with a higher coverage limit
If you’re familiar with the basics of insurance, you probably know that the higher your coverage limit is, the higher your premium will be. It makes sense—your rate is proportional to the amount of coverage you get. However, I want to advise you not to choose a low coverage limit just to get a cheap premium.
Small business lawsuits can cost tens of thousands of dollars. If you get involved in a legal battle that ends up costing more than your policy’s coverage limit, you’re going to be responsible for making up the difference out-of-pocket. If you don’t have the funds, it’s possible that your personal assets, like your home and retirement accounts, could be at stake.
How much does E&O insurance cost?
The cost of E&O insurance is not a fixed price. There are lots of different factors that impact the cost of E&O insurance, and every business pays a different rate. If you run a social media management company, your E&O insurance policy is going to be different from your friend who owns an accounting firm.
Here are some of the criteria that insurance companies look at when they calculate your rate:
- Your industry. If your business is in a high-risk industry, like personal training, construction, or IT, you’re going to pay more for E&O insurance.
- The number of employees your business has. The more employees your business has, the higher your E&O insurance premium is going to be. Conversely, having fewer employees usually means paying less.
- Claim history. Business owners who have filed insurance claims in the past pay higher premiums than individuals with a clean claim record.
- Coverage limit. Policies with a high coverage limit are more expensive because you’re paying for more protection. You can get a more affordable rate by choosing a lower coverage limit.
- Deductible. Choosing a low deductible will increase your E&O insurance rate, and vice versa.
Besides the factors that are specific to your business, another thing that affects your E&O insurance premium is the insurance company that underwrites your policy. Every insurance company will charge a slightly different rate because they weigh individual factors differently.
To give you a sense of what you can expect to pay for E&O insurance, I found some sample rates online.
- Progressive customers pay an average of $46 per month for E&O insurance.
- Insureon reports that its customers pay a median monthly rate of $59 for coverage.
- The Hartford says that the average annual cost is somewhere between $500 and $1,000 per employee, which evens out to roughly $41 to $83 per month.
Where to get errors and omissions insurance
There are lots of insurance companies on the market that sell E&O insurance. It’s one of the most popular business insurance policies you can get.
Before you buy E&O insurance, I suggest getting quotes from multiple providers to see which one can offer the lowest price for the amount of coverage you want.
Is errors and omissions insurance legally required?
Some types of insurance, like car insurance, are required by law. But business insurance, including E&O insurance, is not legally required in order to start or operate a business. However, keep in mind that you might need to purchase coverage anyways.
Not only does E&O insurance protect your business, but it also offers protection for your clients and customers. As a result, it’s possible that some clients may require you to carry E&O insurance before they will agree to work with you.
Plus, having E&O insurance can be an effective way to attract new customers. Having business insurance shows prospective customers that you care about fair business practices, and it gives them peace of mind knowing that they are covered financially if issues were to arise.
If you own a business, E&O insurance is a good investment. It protects you legally and financially if a third party sues your business for professional errors or work oversights. Without insurance, you have to pay for your lawyer costs, court fees, and settlements entirely out-of-pocket. Not fun.
The cost of E&O insurance is different for every business, but comparing quotes is a surefire way to find the most affordable coverage. There are tons of insurance companies that sell E&O insurance, and if you have questions about coverage, don’t be afraid to chat with an agent. They can help you decide how much coverage is right for you, and what other types of business insurance you might need.