Many business owners have taken the necessary steps to insure against injury and property losses, using traditional commercial insurance coverage. They may not have considered professional negligence.
Errors and Omissions (E&O) insurance, also known as Professional Liability insurance, protects organizations or individuals against claims of financial loss due to negligence in the delivery of professional services. General Liability insurance does not cover professional liability for errors or omissions that are actual or perceived. General Liability covers bodily injury and property damage.
The insurance requirements of business owners are becoming more complicated as the business environment becomes more complex. It protects businesses in two crucial areas, legal defense fees and settlement costs.
Most E&O policies will cover defense costs, which, even if the allegations are found invalid, can cost tens of thousands of dollars. Many small businesses and individuals could be facing serious financial stress or even bankruptcy due to high legal defense costs.
Who’s at Risk?
Professionals who most commonly need E&O insurance include doctors, lawyers, engineers and consultants. However, there are a handful of businesses in which E&O coverage is often overlooked, these include advertising agencies, Web hosting companies, service providers, Web and graphic designers, and other Internet-based service companies. Nearly every organization that provides a professional service to a client for a fee has E&O exposure, and because professional requirements are typically undefined in legal terms, Professional Liability insurance shields businesses from the unforeseen.
Sometimes, clients may require subcontractors to show proof of professional and general liability insurance. Any business that provides specialized service or performs work on a project that is critically important to the client’s business, will want to insure themselves against E&O claims. This exposes the contracted business to legal liability. A client can file claims if they feel that the task was not completed as promised.
* Software or system failures that cause a client to lose profits
* Failure to perform duties
* Loss of client data
* Copyright infringement on Web site and software development
* Failure to meet pre-determined benchmarks on specific projects
Quality control can help reduce errors and omissions but no company is immune to them. Even with the best and brightest employees serving on the frontline, mistakes will happen and if the client feels the service was not completed as promised, if it costs the client money, or damages their reputation, then the company could be at risk of E&O litigation.
Assuring that the policy meets company needs
The cost of errors and omissions insurance cover can vary greatly. There are many factors that need to be considered, including the type and nature of the business, its location, claim history, size, and the business’s size. The competition among insurance providers, however, works to the business owner’s advantage, and the process for receiving an E&O insurance quote, cost comparison and detailed policy information should be fairly simple.
The process can vary. Some insurance companies will request copies and descriptions of quality control procedures. Others may just ask for an application. When searching for an E&O insurance quote or reviewing a policy there are several key features to be mindful of:
* Coverage should include legal defense costs.
* Both W2 employees and 1099 subcontractors should be covered – the company should be protected against claims from work performed by 1099 subcontractors on the company’s behalf. However, in many cases 1099 employees are not covered. They would require their own insurance coverage for errors and omissions.
* Optional coverage for allegations of copyright and intellectual property infringement – this protects the company from claims alleging copyright infraction. Software, systems, and processes are especially important because they have the most well-known “intellectual property”.
* Personal injury coverage such as claims of libel, slander and invasion of privacy
* Worldwide coverage – this covers incidents regardless of where they originate.
Defending a claim
In the event a claim is filed, E&O insurance will adequately prepare the company to defend its case. It can provide a solid legal defense for small businesses and individuals, and possibly save them from serious debt. The laws and precedents that regulate the technology industry are still being developed, which can leave IT professionals in unfamiliar legal territory.
Although mistakes are inevitable, there are steps that businesses can take in order to minimize the risk of them.
* Have a written contract detailing what service will be provided, what is not included and the fees for delivering that service
* Communicate throughout the entire job; give the client realistic expectations upfront and provide regular status updates
* Implement quality control procedures, and regularly conduct audits to ensure the procedures are being adequately executed
After the contract has been written, ensure that it contains all of the following:
* Limits of liability – the dollar amount per occurrence of liability
* A section detailing the services the company will be providing
A written contract is one way businesses and individuals can protect themselves, however E&O insurance will provide an extra layer of protection against the unknown and unexpected. It is expensive and time-consuming to defend a case. No matter if a suit is dismissed or not, attorneys fees will still have to be paid. Sometimes the costs involved in defending a case exceed the amount of the settlement. E&O insurance covers attorney fees, any settlement costs that may result, and allows the business owner to continue operating without fear of potentially having to face bankruptcy or a mountain of debt.
