Human error is to blame for everything from sinking the Titanic to the wedding planner giving the photographer the wrong date, leaving the bride and groom in a lurch. While claims against Titanic operators have passed their due dates, professionals today must be prepared to protect themselves from customers alleging errors and omissions, or risk going down with the ship due to hefty legal and defense costs.
Who Should Have E&O; Insurance?
When operating a business, insurance costs are always a primary consideration. Business owners should not stop with standard general liability coverage or a property insurance policy. Errors and omissions insurance is business liability insurance that protects professionals from the cost of lawsuits resulting from an alleged error or omission during the work process. Professionals in real estate, insurance, architecture and engineering are ideal candidates for errors and omissions insurance, but so too is any individual or business offering professional services.
Determining the cost of errors and omissions insurance depends on a number of variables, such as selected liability and deductible amounts, total revenues, industry and even location. Most providers will require a significant amount of information and documentation from applicants, including previous claims, examples of how contracts are written and who makes up the client base. As is the case in any insurance portfolio, the devil is in the details and cost will be impacted by whether or not all legal fees are handled, if punitive damages are covered and if all employees are insured.
At the time of publication, costs vary dramatically. Small business consulting firms comprised of one to three people should be able to find about a million dollars of E&O insurance for approximately $1,000 to $3,000 a year -- usually less than 1 percent of their gross revenue. However, be aware that the number of claims per year differs greatly depending on the industry, and E&O costs increase for those businesses that typically experience more claims. There are also discount providers catering to specific niche markets, like life and health insurance agents who pose a lower risk. These professionals pay a premium in line with the risk posed to the insurer, and costs range from $500 to $1,000 per agent. On the other end of the spectrum are high risk industries where coverage can range from $10,000 to $25,000 annually.
Worth the Cost?
If you speak with six business owners, you're likely to get six different stories of why they do or do not carry E&O Insurance. Those who have it do so because they know the costs of a legal battle can bury their business. They are savvy enough to know that E&O insurance is also a good sales tool, instilling confidence in prospective clients. Businesses opting not to pay E&O premiums are usually brand new businesses, putting every penny back into the business or experienced operators in a line of work where law suits are infrequent, who feel investing in such insurance is a waste. In either case, the smart business owner knows the risks associated with doing business with his particular client base and weighs it against the cost of insurance premiums. Be prepared by obtaining quotes from a variety of providers and make an informed decision.