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Professionals come in many shapes and sizes – ranging from insurance brokers and accountants to lawyers, engineers and architects. As a professional, your clients are depending on you to deliver accurate and impartial advice and counselling. If you fail at this duty and your advice causes the client to suffer bodily injury or a financial loss of some kind, you might be found liable in court and have to compensate the client. This type of liability is special and is not covered by your standard commercial general liability policy. For proper coverage, you should have Errors & Omissions insurance.
Most commonly, lawsuits against professionals allege misrepresentation, breach of legal duties, offering misleading or incorrect advice or for failing to disclose conflicts of interest. In a recent case, a tax accountant made a mistake while handling her client’s taxes which caused her client to be audited and fined by the CRA. The client later sued her practice to recover damages.
In light of these risks, all professionals should protect themselves by purchasing the appropriate errors and omissions insurance.
Most policies will even cover you for fines and penalties imposed by regulatory bodies.
What is errors and omissions insurance?
Errors and omissions (E&O) insurance — also known as Professional Liability insurance — is a subset of a broader category of liability insurance commonly referred to as professional indemnity insurance or professional liability insurance. This type of insurance is designed to protect professionals against liability arising out of actual or alleged negligence in the performance of their professional duties.
If there is a claim, errors and omissions insurance will step in and the insurer will appoint an experienced lawyer to defend you. They will also pay for the cost of your legal defense (lawyers’ fees, court costs, interest payments on the settlement amounts, etc.) on top of the actual settlement or court awarded judgement made against you if you were to be found liable. Most policies will even cover you for fines and penalties imposed by regulatory bodies.
One important caveat here is that once the insurance company steps in, they will be taking charge of your defense. This means the insurance company can choose to settle a claim even if you feel like you’ve done nothing wrong.
Do I need errors and omissions insurance?
The short answer is yes. Mistakes happen every day so every prudent professional should have errors and omissions insurance in place.
Even if you did nothing wrong, clients might initiate a lawsuit out of a simple misunderstanding causing you to spend thousands on legal fees before the whole thing is settled. These types of expenses can bankrupt a small business and can serious damage your reputation. An often overlooked benefit of having E&O insurance is that the insurer will be responsible for defending all claims made against you – even if their claims are later shown to be untrue.
Depending on what type of business you’re in, it might also be a legal requirement that you obtain E&O insurance before doing business. This requirement might be imposed by a regulatory body or by business partners.
What type of E&O insurance do I need?
Every professional is unique and every industry faces its own set of risk and challenges. In response to this, insurance companies have devised different E&O insurance products with coverages tailored that specific industry.
Errors and omissions claims can also have a long tail. You might have serviced a client and not have a claim pop up until a few years later. If you’re still in business, your current E&O insurance will step in to provide coverage. But if you’re going out of business or no longer keeping an active E&O policy, you have the option to purchase a special type of E&O insurance called run-off coverage. This protects you against liability for a certain period of time after your business closes.