One of the most important insurance coverages for any small business – and especially for independent IT project managers – is errors and omissions (E&O) coverage. Many small-sized technology companies don’t understand what this coverage includes and how it differs to other types of insurance policies.
Here are answers to some of the most common questions that IT Project Mangers ask about E&O insurance:
What is the difference between professional liability insurance and errors and omissions?
The terms “professional liability insurance” or “errors and mistakes insurance” refer to different types of the same insurance. This protects your company in the event that a client claims that you or one your employees made a mistake when providing IT services and causes that client financial loss.
What’s the difference between E&O insurance and general liability insurance?
While E&O coverage (also known as professional liability insurance) covers you for errors you may make while doing your job, general liability insurance responds to claims of bodily injury or property damage. You or your employee injures or damages someone’s property, or someone walks into your office and falls. Clients will often request general liability in contracts. This is because they want to be sure that all businesses offering services on their premises are covered for liability.
A Business Owner’s policy, also known by a BOP, covers both general liability and property insurance. BOP property insurance covers your business property, at your office or client’s location, against loss or damage due to theft or fire. For solo practitioners or small businesses, a BOP is a great choice.
IT project managers might need both professional and general coverage to comply with client contracts. Although you can purchase property and general liability policies separately, a bundle of them in a BOOP is more cost-effective. It provides more coverage to meet the needs of small IT companies.
Isn’t general liability insurance already able to cover errors and omissions?
No. No. Although general liability covers bodily injury and property damages, it does not cover litigation involving professional negligence or the failure to perform professional duties. You will need separate professional liability insurance policies.
So, what kinds of risks does E&O insurance cover?
E&O coverage is triggered when your client alleges that you or one of your employees made a mistake in the course of providing IT services or IT project management services. Clients could allege that you or one of your employees made a mistake in the design of their software, which results in a project not performing as expected or taking longer than expected. This can cause costs to rise or lead to client loss.
Certain types of business disputes may not be covered, such as when a client defaults on a payment or if someone sues you because they robbed a customer. That’s why it’s important to understand exactly what your E&O policy does cover, so that you can avoid these types of risks or employ legal contracts to cover them. It is also important to remember that E&O insurance is designed to defend you and pay legitimate demands for financial compensation from a client. An E&O policy will not reimburse you or compensate you for your internal costs to correct a problem.
I don’t intend to make any mistakes that could lead me to being sued. Do I really need E&O coverage?
Statistics show that there is a very low chance of you being sued. However, most business owners eventually reach a point where the risk of going without E&O insurance doesn’t justify the savings. Is there anything that you can’t control in an IT project? What happens if a subcontractor falsifies their capabilities and impedes a project’s progress? If a developer makes a mistake in a line or code that results in the client being unable to pay their invoice? If your backup strategy, which you carefully created, is not implemented due to human error and all important data is lost. If the contract is under your name, then you are the one responsible.
You don’t need to make a mistake in order to be sued. No matter how meritless the suit is, any client can sue you. Nearly everyone has dealt with a client who is unreasonable, difficult or impossible to please. It can be very difficult to continue your business if you are the victim of a lawsuit. You can put in your best effort, but other factors could increase the risk.
What is the cost of this?
The cost of E&O insurance will vary depending on your company’s revenues and location, as well as the limits of liability and deductible you choose. Most one- or two-person firms can get $1 million in E&O insurance for around $1,000 per year. For most independent IT project managers, that is less than 1 percent of gross revenue, and the peace of mind that maintaining E&O insurance brings is often well worth it.
If you’re not sure it is time to protect your technology business with E&O insurance, it doesn’t cost anything to talk to an insurance broker to learn what your options are before you make a decision. For a customized quote, contact a technology agent.
