Even the best-run businesses occasionally make mistakes. That’s why having errors and omissions (EO) insurance is such a good idea. Here’s what it covers:
- Court-ordered payments stemming from a company’s actions, advice, or oversight.
- Legal expenses incurred by the business while defending against EO claims.
- Out-of-court settlements with aggrieved parties.
- Court costs associated with EO complaints.
- Professional arbitration fees.
What Does EO Insurance Protect Against?
EO policies are designed to guard your business against fees and damages caused by “good faith” errors.
For example, let’s say that you own a cybersecurity firm. You’re hired to protect a manufacturer’s internal network from hackers. But, despite your best efforts, a virus finds its way into the company’s servers and causes them to crash.
After weighing their options, the owners decide to sue your business.
Your options are to either defend your company in court or pursue a financial settlement. No matter which you choose, the associated costs may deplete your resources entirely.
EO insurance was created with these types of scenarios in mind. It can allow you to regroup and recover after committing an honest error. It can also create a “win-win” outcome in which all parties walk away from the incident satisfied.
Is EO Insurance Only for Tech Companies?
No. To the contrary, virtually any service provider can benefit from having EO insurance. Examples include:
- Print shops.
- Bookkeeping offices.
- Private educators.
- Advertising/marketing firms.
- Barbers and hair stylists.
- Pet care businesses.
- Wedding planners.
- Nonprofit foundations.
- Blue-collar tradespeople.
In many industries, EO insurance is a precondition for doing business in the first place. Examples include realtors, insurance agencies, and investment counselors.
Can EO Insurance Protect Companies Against Unjust Claims?
Absolutely. In fact, EO insurance may save more than your bank account. It might also salvage your professional reputation.
More than 40 million lawsuits are filed in the US each year, according to the US Financial Education Foundation. Many of these cases are considered “frivolous” lawsuits initiated by unethical attorneys or cash-seeking complainants. Often, their goal is to ruin the business owner’s name, drive the company out of business, or obtain a quick cash settlement.
Fighting these types of unjust accusations is important for both your integrity and your bottom line. It’s also expensive. That’s why EO coverage includes reimbursement for legal fees, court costs, and investigative expenses. Otherwise, you may have to accept blame for something that never actually occurred.
How Much Does EO Insurance Cost?
The cost of EO insurance depends on many factors, including:
- The size of the covered business: larger companies typically have higher premiums.
- The type of company: for example, an outdoor adventure agency will probably pay more for coverage than a neighborhood bakery.
- The company’s track record: does it have a history of satisfied customers? Or is it constantly fighting off lawsuits? The answer will have a major impact on its premiums.
What is an EO Policy’s Retroactive Date?
Many EO policies include protection for incidents that occurred prior to the policy’s inception. For example, let’s say that you began your EO coverage on December 1, 2022, but opted for a retroactive date of December 1, 2019. This means that you’re protected against errors or oversights committed up to three years before your policy officially begin.
Are There Limits to What EO Insurance Will Cover?
EO insurance is designed to guard against “honest” mistakes, the kind that any professional can commit during the course of his or her day. It’s not meant to cover intentional errors.
For example, imagine that a print shop is hired to print 1000 wedding invitations. The owner of the shop, who is also the bride’s ex-fiancé, deliberately misprints the date of the event.
The newlywed couple, rightfully enraged, files suit against the shop. If the couple can prove that the mistake was committed intentionally, then the insurer may deny the shop’s EO claim altogether.
How Can Business Owners Prevent Customer Complaints and Lawsuits?
Dealing with a consumer claim or lawsuit is never fun, even for businesses covered by EO insurance. Here are some ways to help ensure that this problem never occurs:
- Take complaints seriously: treat the aggrieved person with courtesy, do your best to achieve a fair resolution, then follow up with the customer afterwards to ensure that he or she is satisfied with the outcome.
- Document the incident: a written record of what transpired can protect your business against a customer’s faulty memory, if the incident ever evolves into a formal claim of wrongdoing.
- Use proactive process improvement: great businesses are always looking for ways to up their game. If you’re constantly striving to provide better service, then you’re more likely to have happy customers.
In a perfect world, none of us would ever make mistakes. But, as we all know, the world is far from perfect. That’s why we recommend EO insurance for your business. Please consider adding this valuable protection to your existing coverage.