Imagine a world where businesses can be managed without worrying about making mistakes.
In such a world every client would be completely satisfied with the service and each product would work as it was intended.
However, this is not the way the real world works. Our business reality is that deadlines are broken and clients and customers are disappointed when they are not met.
Clients who are unhappy, particularly if they have suffered damage as a result of your services can bring forth costly lawsuits. Even if you can prove there was no wrongdoing, the defense costs associated with a non-existent lawsuit can be a major financial burden. Unsatisfactory results and professional errors can result in costly claims that could be financially devastating for your company.
Professional liability insurance is also called errors and omissions insurance. It protects your company against financial losses that may arise from negligence, mistakes, omissions or misrepresentation. The preferred errors and omissions policy covers both defense costs as well as settlements or any compensation that may be ordered to you by the court. Embroker can provide a professional insurance quote in less than 10 minutes.
This is why errors and omissions insurance is so important for professionals or businesses that offer services.
Most business owners want to find out how much an E&O policy will cost to protect their company. This is a hard question to answer.
When comparing companies that work in different industries, there are different risk profiles for each company. Complex formulas are used by underwriters to calculate your risk profile and the insurance cost of each policy. There are certain factors that they consider which strongly correlate with the cost of your insurance.
What Effects Does E&O Insurance Premiums Have?
Although it is impossible to predict your premium, we can give you insight into what businesses should expect to pay for their coverage. We can also provide information about the most common factors that affect premiums.
A small business can expect to spend between $500 and $1,500 annually for E&O coverage. Enterprises and larger companies have greater exposure, and will need to pay more annually for E&O coverage. Usually between $500 and $1,000 per employee.
These estimates are only rough. Business owners need to understand how each aspect of their business will impact premiums. E&O insurance costs are influenced by many factors, such as industry risk, coverage limits, history of business claims, and location.
Let’s dive deeper into these and other factors that can impact your premium.
Industries
Insurance providers will consider your industry before settling on premiums. Two important factors are often determined by your industry: the likelihood of you having to pay claims and the cost of resolution. Insurance for specific industries is more expensive. The most expensive errors and omissions insurance has been historically paid by engineering, architectural, or medical companies. This is because any mistake or omission they make can potentially lead to catastrophic consequences.
Localization
The location of the company will impact its premium. Certain states in the United States have minimum coverage requirements for certain industries. This means that companies operating in these states will typically have higher insurance rates.
Oregon and Idaho, for example, require lawyers to have legal professional liability insurance. 23 states, however, mandate that law firms disclose to their clients whether they are covered under an E&O policy. Most states require that medical professionals have a minimum amount of medical malpractice insurance.
Premiums will be higher for businesses located in densely populated areas like New York City, San Francisco and Los Angeles. Your E&O premium will vary depending on the state and regional insurance requirements of your business.
Coverage Limit
This is a simple math equation. Higher limits typically mean that you will pay a higher premium. The specific risk profile of a business will determine how much coverage it needs. The average individual limit is $1,000,000.
It is important to know how coverage limits work when you are looking for errors & omissions insurance. A typical E&O policy will have two types: an aggregate limit and an occurrence limit.
- Occurrence LimitThis is the maximum amount your insurer will pay for a single claim. This limit is the maximum amount you can expect to get for one event, regardless of whether more than one party suffers from it and decides that they want to sue.
- Limit on Aggregate:This is the maximum amount your insurance company will pay in total over the policy’s lifetime.
Yearly Revenue
Before quoting you for an E&O insurance, your insurer will require proof of your annual revenue. It is easy to see how revenue affects premiums. The higher a company’s income, the more insurance it will need to pay. This is also a simple fact. Companies with large revenues are more likely to be sued. They will often have to pay more than small businesses that have less revenue if they lose the case or have to settle it in court.
The Company Size
A company’s employees are more likely to make mistakes than others. This means that your premium will rise if you have more employees.
Years of Experience
Premiums for mature businesses and professionals can be lower. Insurers consider the years of the company as a reflection of the quality of its services.
History of Claims
Insurers will request that you disclose the number of E&O-related lawsuits against your company in the past. Your premium will increase if you have had to deal with more claims.
Policy Deductible
A deductible is the money that your company must pay before the policy kicks in. Two types of deductibles are available for most E&O policies.
- The First-Dollar Defense (FD) Deductible: Only applies to actual paid claims. The company does not have to pay any money until the claim is settled.
- The Defense-And Loss (DL) Deductible: Adds the deductible to defense costs to be considered in addition to any paid claims.
Typically, if an E&O case is filed against you by an insurer, they will hire an attorney to represent you. The defense costs can start to mount as soon as the claim is filed. An attorney will need to create a file, research and prepare the case, as well as answer the lawsuit.
The company will be responsible for a portion of the legal fees even if the lawsuit proves to be completely unfounded and is dismissed.
The type and amount you choose for your deductible will have an impact on the E&O premium. The deductible will determine the premium. A FD deductible is more costly than a DL.
The potential cost of not having E&O coverage
A business that does not invest in an E&O insurance policy or fails to secure adequate coverage is taking a significant risk.
No matter how skilled you are at what you do, mistakes can happen. The financial consequences of E&O claims can be severe. The defense costs can quickly add up even before a settlement or awards of damages are reached. Even if your claim is not frivolous, it is still necessary to hire an attorney to represent you in the lawsuit. This is an expense that is nearly out of your control.
It’s more than money. E&O claims can create chaos and uncertainty in many ways. Think about the well-being of the employee who made the mistake, and how they might feel.
If employees have to make sure they are error-free in their work, productivity could plummet.
Management and employees can feel overwhelmed by the stress and low morale that comes with a claim not being covered. This perspective shows that E&O policies are not as expensive as they could be if you don’t have one.
You can have peace of mind knowing that your business will be protected no matter what.
Many E&O insurance companies will hire a law office of their choosing to handle your case. This relieves you from the often difficult task. They will work with you and your employees in order to analyze the allegations, and to provide all the documentation necessary to defend the case.
These factors lead us to recommend that any professional service provider should strongly consider getting the correct errors and omissions coverage. Although it might seem like an unnecessary investment, the right coverage can make the difference between success and ruin in the event of a costly professional liability suit.
To discuss your options regarding purchasing errors & Omissions coverage, and to ensure that your company is receiving the right amount of protection at the right cost, please contact one of our experienced brokers .
