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When Do You Need an Errors and Omissions Policy?

Errors and omissions policies are a type of commercial liability insurance designed to protect professionals who might make mistakes in their work or in the advice offered to clients. It generally pays for things like hiring an attorney, going to court, and settling with dissatisfied clients who have suffered material losses due to a professional's mistakes.

Who Needs Errors and Omissions Coverage?

Any business or independent professional who offers advice or services may need an errors and omissions policy. While this type of commercial liability insurance is usually associated with the financial and legal industries, it applies to a number of other fields, as well. Examples of people and businesses that take out errors and omissions policies include:

  • Accounting firms
  • Financial planners
  • Tax preparation professionals
  • Insurance brokers
  • Advertising agencies
  • Marketing consultants
  • Graphic designers
  • Management or business consultants
  • Real estate brokers
  • Travel agents
  • Interior decorators
  • Tech professionals

What all of these professionals have in common is that they provide intellectual rather than physical services. When clients pay a professional for help in any field, they expect to get good advice. If the advice offered by a consultant, planner, preparer, broker, or another business professional is misrepresentative, inaccurate, or in violation of good faith, the client has a right to sue.

It's also worth noting here that some professionals are required to show proof of errors and omissions coverage before receiving licenses. Over ten states require this extra step of real estate agents, to give just one example. Check local regulations to find out if this form of liability coverage is required.

How Errors and Omissions Policies Can Help

Business owners and independent contractors who provide services or advice to clients can face lawsuits at any time. Errors and omissions coverage pays for legal fees, whether the client's complaint has merit or not. Remember, some clients may try to sue for damages when the professionals who have offered them advice did nothing wrong, and when that happens, legal fees still need to be paid somehow.

What Errors and Omissions Insurance Covers

Anyone can make mistakes, and in some cases, those mistakes could prompt a client or customer to sue. Errors and omissions insurance covers not just legal fees but also lost earnings that a policyholder may incur during courtroom or disciplinary hearings. Depending on the policy, the coverage may come into effect not just when policyholders make mistakes but also when they are accused of negligence, misrepresentation, the violation of good faith or fair dealing, or offering inaccurate or false advice.

What Errors and Omissions Insurance Does Not Cover

Errors and omissions insurance is a very specialized type of insurance designed exclusively to cover the costs incurred when customers or clients sue a policyholder over the results of bad advice or services. It does not cover:

  • Wrongful employment practices
  • Disclosure of trade secrets
  • Patent violations
  • Bodily injuries
  • Property damage
  • Data breaches

For these issues, business owners and independent professionals will need different business insurance policies. A good general liability policy may offer some level of protection, but be sure to ask an insurance broker for advice about other specialized forms of coverage that may be applicable.

A Good Investment

No matter which of the above-described situations apply, having errors and omissions coverage is a good investment. It gives business professionals the peace of mind of knowing that they won't be on the hook for paying legal costs. It may, as a result, even save a business from bankruptcy someday.

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