What is errors and omissions insurance?

In a nutshell

Errors and omissions (E&O) insurance is professional liability insurance that protects your business from lawsuits as a result of mistakes made while providing professional services.

• An E&O policy can be valuable for some businesses as a standalone policy, or as part of a larger business insurance package.
• E&O insurance does not protect against criminal activity on the part of business owners and employees.
• Rates for E&O insurance vary based on the industry and the level of risk.

How does errors and omissions insurance work?

It’s possible a client may be unhappy with the professional advice or performance of a service your business provides. If they feel you didn’t live up to their expectations or caused them a financial loss, they could sue you, regardless of whether or not you actually made a mistake.

An errors and omissions insurance policy also provides protection in the following situations:

• Missing deadlines.
• Giving the wrong advice.
• Professional negligence.
• Not delivering a promised service.

Let’s say you’re an investment professional and you advise your client to invest a significant amount of money in a promising stock. Then the stock tanks, taking your client’s investment along with it. They sue you for negligence. Errors and omissions insurance coverage can cover the cost of your legal expenses.

Business owners can protect themselves, their employees, and subcontractors with E&O coverage.

What does errors and omissions insurance cover?

E&O insurance covers the following, up to your policy coverage limits:

• Court costs such as paying expert witnesses to testify on your behalf.
• Administrative expenses to mount your legal defense.
• Attorney fees, which can range from $5,000 to over $100,000.
• Judgment or settlement costs, which could be thousands or millions of dollars.

An E&O policy will only cover claims filed during your active policy period, on or after the retroactive date or extended reporting period.

The retroactive date is commonly found in claims-made policies like E&O insurance that determine whether a claim is covered if made during the policy period. For example, let’s say your policy is effective from January 1, 2024 to 2025, with a retroactive date of January 1, 2024. That means any claims made against you for something that happened before the retroactive date wouldn’t be covered, even if the claim is made during the active policy period.

An extended reporting period provides coverage for a specific period after the policy ends. This allows for potential lawsuits that can arise from past mistakes that a client is only now claiming for.

What does errors and omissions insurance not cover?

E&O insurance won’t cover claims for dates that happen before the policy’s retroactive date or after the extended reporting period.

Professional liability insurance also won’t cover:

• Business property damage: A business owners policy, or BOP, covers your business assets and commercial property.
• Business vehicle accidents: A commercial auto policy covers claims involving your work trucks and other vehicles.
• Customer injury or property damage: A general liability insurance policy can protect your small business from claims that occur for customer bodily injury, personal and advertising injury, or property damage during normal business operations.
• Coverage for cybercrimes: Cyber liability insurance can cover losses due to cybercrimes like phishing, data breaches, hacking, and network failures.
• Employment claims: If an employee makes allegations against your small business, such as harassment, discrimination, or wrongful termination, employment practices liability insurance (EPLI) can cover your legal defense costs.
• Employee work-related injury or illness: If an employee becomes sick or gets hurt at work, workers’ compensation insurance can cover their lost wages, medical expenses, and legal fees if they sue.

An insurance agent can help you choose which small business insurance policies are right for you.

How much does errors and omissions insurance cost?

Several factors determine the cost of E&O insurance for your small business, including:

• Coverage limits and deductible.
• Claims history.
• Industry type and risk exposure.
• Business location.
• Number of employees.
• Annual revenue.
• Insurance company.

Next Insurance monthly premiums start at $19 on average for E&O insurance, though the actual cost will depend on your industry and specific needs. A Next Insurance policy will cover your primary business or side hustle in industries such as accounting, insurance, real estate, and notary public.

Insureon, an independent broker, analyzed customer costs for professional liability policies among various insurance companies. For $1 million per occurrence and $1 million aggregate per policy, the median price is $61 per month, or $735 per year. Less than 30% of small business owners pay over $100 a month, while 32% pay less than $50 monthly.

Your business size can help you determine a ballpark rate for E&O coverage. Expect to pay around $500 to $1,000 annually per employee, though other factors like revenue and claims history could change that estimate.

Your industry also plays a significant role in your insurance premiums. Higher-risk businesses pay higher insurance costs, while lower-risk companies get lower rates. For example, the building design industry pays an average of $142 per month for the same coverage that insurance professionals and accountants pay around $42 monthly for, according to Insureon.

Comparing E&O insurance quotes from different small business insurance companies can help you find the best deal. You may also get a discount if you combine E&O insurance coverage with other types of business insurance.

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Consider purchasing errors and omissions insurance if you provide advice or professional services to clients or customers. Some examples of small businesses that can benefit from professional liability coverage are:

• Real estate agents.
• Tax preparers.
• Tech companies, including insurtech.
• Medical professionals.
• Insurance brokers and agents.
• Financial institutions.
• Engineering firms.
• Lawyers.
• Graphic designers.
• Pet groomers.
• Architects.
• Financial and investment advisors.
• Veterinarians.
• Software and website developers.
• Consultants.
• Educators.
• Marketers.
• Advertising and publishing companies.

If the cost of being sued outweighs the risk of not getting insurance, it’s a good idea to price out E&O insurance.