Error and Omission Insurance

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Error & Omission (E&O) Insurance or Professional Liability Insurance offers protection for lawsuits, both defense costs and settlement awards, arising from professional errors, omissions or negligence. Some examples are failure to provide a service, misrepresentation of facts, improper documentation, and negligence in providing a service. We live in a very litigious society and one could even be drawn into a frivolous suit or suit due to an innocent association. Professional liability is normally excluded in a commercial general liability policy. Most policies include the “duty to defend” which means that they supply panel council and the defense costs are paid. Typically, there will be language stating “worldwide coverage” covering a claim occurring anywhere in the world but the suit must be brought into the U.S. court system. Some companies may require it to do business with them, particularly government related jobs.

One might see Defense Costs (inside or outside the limit) as an option on a quote. Let’s say you have a $1,000,000 E&O policy with a $5,000 deductible. Defense costs are $300,000 and the settlement is $250,000. If the defense costs are inside the limits the policy would pay: $300,000 (defense) + $250,000 (settlement) - $5,000 (deductible) = $545,000. The $1,000,000 limit would be reduced by $545,000. Therefore $455,000 is left on the policy limit for the remainder of the term.

On the other hand, if defense costs are outside the limits, for the same scenario, the policy would be reduced by $250,000 (settlement) - $5,000 (deductible) for a total of $245,000. The $300,000 in defense costs would be paid “outside the limits” and therefore the balance left on the policy limit for the remainder of the term is $755,000. The carrier charges an additional premium for this coverage

When considering E&O insurance ask oneself: Do I want to assume the risk of defending myself should I be brought into a lawsuit – both time and money? Can I afford to defend myself in a lawsuit? E&O insurance should be considered part of a business' insurance solution.