Errors and Omissions Claim Process and Coverage Explained

Errors and omissions claims can be a nightmare to navigate, but understanding the process can help you prepare and protect yourself.

An errors and omissions claim is a type of professional liability claim that arises when a professional, such as an accountant or lawyer, makes a mistake or fails to perform their duties properly.

The claim process typically starts with a notice of claim, which is a formal letter sent to the insured professional stating the nature of the claim.

The claim must be reported to the insurer within a specific time frame, usually 30 days, to be eligible for coverage.

The insurer will then investigate the claim and determine whether it is valid or not.

If the claim is deemed valid, the insurer will pay the damages or settlement amount, minus any deductible or excess.

The amount of coverage will depend on the policy limits, which can vary depending on the type of policy and the level of risk involved.

Professional liability policies often have a specific limit on the amount of coverage per claim, as well as an aggregate limit on the total amount of coverage per policy term.

An Errors and Omissions claim is a lawsuit filed against a professional for alleged mistakes or oversights in their work. In most cases, these claims arise from allegations of missed information or incorrect advice.

Home inspectors are particularly vulnerable to E&O claims, with 31 states requiring professional liability insurance as of January 2023. This means that without insurance, home inspectors are responsible for finding and funding their own representation in an E&O lawsuit.

The vast majority of home inspector insurance claims are for alleged mistakes or oversights, often resulting in large payouts for claims and costly defense. This can lead to a significant emotional and financial burden on the inspector, potentially even forcing them out of business.

In fact, the scenario of Robert, an architect, who was sued for professional negligence is a prime example of an E&O claim. The town claimed damages for the costs associated with the construction delay and the additional expenses of altering the design mid-construction.

Companies that provide professional advice or recommendations, such as lawyers, accountants, and real estate agents, also have a high risk of E&O claims. For instance, a lawyer mishandling a court proceeding could result in a large fine, highlighting the importance of having E&O insurance.

Triggering coverage is a crucial aspect of E&O policies. Now that you know what events are covered, here are the typical events that would trigger coverage under an E&O policy.

Events that trigger coverage are not limited to just one type. They can vary depending on the specific policy and circumstances.

A lawsuit or claim against you is one of the most common events that would trigger coverage. This can include allegations of professional negligence, misconduct, or other errors.

You may also trigger coverage if you're involved in a regulatory investigation or audit. This can be a stressful and time-consuming process, but having the right insurance can help protect you.

In some cases, even a demand for money or a threat of a lawsuit can trigger coverage. This is often referred to as "prior knowledge" or "prior notice."

It's essential to understand what triggers coverage under your E&O policy to ensure you're protected in case of an error or omission.

Negligence claims occur when a company fails to use reasonable care, negatively affecting a client. This can happen due to poor oversight that results in errors.

A company may be subject to a negligence E&O claim if it displays a lack of reasonable care when providing a service or product, resulting in damages to a client. For example, software failure resulting in financial damage to a client or physical products malfunctioning can lead to negligence claims.

Breach of contract claims are made when one party believes another has failed to uphold their side of a contract, resulting in financial loss. This can happen when a company ignores an exclusivity agreement, causing reputational damage and financial troubles, as seen in the case of Celmatix suing 23andMe for $100 million in damages.

Negligence is a common type of claim that can arise from professional incidents. A company may be subject to a negligence E&O claim if it displays a lack of reasonable care when providing a service or product, resulting in damages to a client.

Negligence E&O claims often occur when a company fails to use reasonable care, leading to errors. For example, if you helped a client code their website but there were bugs in the final product, they could argue that your work was careless.

These types of suits are often associated with failure of oversight or quality control. They could include software failure resulting in financial damage to a client, or physical products malfunctioning. In August of 2019, retail giant Walmart claimed faulty solar panels manufactured by Tesla resulted in at least seven locations catching fire, demonstrating the necessity of strong E&O insurance for any company.

A company that fails to provide a product or service that functions as marketed may be vulnerable to an E&O claim. In the event the client decides to sue, an E&O policy would cover the claimed damages, shielding the company from significant losses.

Here are some examples of negligence claims:

Misrepresentation can be a serious issue for businesses. It occurs when you make a false statement to a client in order to persuade them to sign a contract.

Emily, a financial advisor, made a false statement to her client Mark by claiming that a tech startup had been vetted and showed substantial promise. This led to Mark investing a large portion of his savings, which ultimately went bankrupt.

You could be at risk for a misrepresentation claim if you don't disclose all the fees associated with your services. For example, quoting a client $500 per month for remote IT management without mentioning the $100 fee to use your data storage each month.

Businesses often try to persuade clients with promises of high returns or guaranteed results, but these promises can be misleading and lead to misrepresentation claims.

In the case of Emily and Mark, Emily's misrepresentation led to Mark losing nearly all his invested money. He sued her for reimbursement and potential earnings from a more stable business.

E&O insurance doesn't cover bodily injury or property damage, as these are typically covered by general liability insurance.

You might be wondering why you need E&O insurance if general liability already covers some of the same risks. The answer is that E&O insurance fills gaps in coverage that general liability doesn't address.

In other words, E&O insurance is designed to protect professionals from financial losses due to errors or omissions, but it's not a replacement for general liability insurance.

E&O insurance, also known as professional liability insurance, has its own set of exclusions and limitations.

E&O insurance does not cover bodily injury or property damage.

You'll generally obtain E&O insurance to cover gaps in your general liability insurance policy, which already covers bodily injury and property damage.

Fraudulent acts are not covered by E&O insurance policies.

Lying to clients for financial or personal gain can lead to an E&O lawsuit for fraud.

If a company lies about its services and expertise to land a high-paying client, it can be sued for fraud.

Overstating capabilities or expertise to a client can result in incomplete or sub-par work, leading to an E&O claim for misrepresentation and/or fraudulent inducement.

Even if a business doesn't intentionally mislead its client, clients can still file a fraud suit if they believe they were conned.

In cases where the suing party can't prove intentional fraud, E&O insurance can still cover damages if the business is held liable.

Tech companies that provide professional services or expert advice are at risk of being sued if a client could claim that they suffered financial losses due to your inadequate or negligent work.

The costs of a claim can be steep, with legal fees, court costs, and judgments adding up to thousands of dollars. This can also cost you time and resources, and do lasting damage to your company's reputation.

Every tech company is at risk for errors and omissions claims, including software developers, IT consultants, IT project managers, and IT staffing firms.

If you're a tech company that provides professional services or expert advice, you're at risk for technology errors and omissions claims. These claims can arise if a client could claim that they suffered financial losses due to your inadequate or negligent work.

Tech companies like software developers, IT consultants, IT project managers, and IT staffing firms are all at risk for errors and omissions claims. A single claim can cost thousands of dollars in legal fees, court costs, and judgments.

If a client is unhappy with your company's work, they may file an errors and omissions lawsuit and sue your business. This can happen due to trivial complaints or major issues that have a real impact on the client's business.

Some common reasons for errors and omissions claims include mishandling a client's cybersecurity, leading to a data breach, or delivering a project late or going over budget.

Here are some tech companies that are at risk for errors and omissions claims:

Product manufacturers can still be at risk of errors and omissions, even if they don't carry the same risk as other businesses.

Contractors and manufacturing companies often don't carry the same E&O risk as other types of businesses, but separate coverage is recommended in certain instances.

These policies guard against errors like faulty materials and mistakes in material ordering.

Manufacturing companies are also at risk of mistakes in the finished goods, even if they only resulted in financial harm to the client.

Product liability requires bodily injury or property damage, but E&O coverage can still provide financial protection in other cases.

Healthcare companies that directly treat patients need medical malpractice insurance. This is because even well-intentioned advice or procedures can lead to harm and lawsuits.

Almost every company in the healthcare industry faces the risk of malpractice lawsuits. These lawsuits can result in massive judgments.

Companies in the healthcare field should talk with a broker who has experience writing coverage in the medical industry. This can help them navigate the complexities of medical malpractice insurance.