Anyone who’s bought a house has relied on a set of professionals to make it happen - a realtor, a home inspector, a handyman, an appraiser. What if one of these people made an error that cost you money later, or cost you the whole real estate deal? Would you sue? Some people would, and that’s why a real estate professional - as well as any professional who provides services - is at risk.
Errors and omissions insurance (E&O) is a type of professional liability insurance that protects your company when an error is made in providing a service, or the service wasn’t provided to a client’s satisfaction. In general, it addresses violations of good faith, misrepresentations, and problems arising from taking advice. E&O insurance can cover expenses including legal fees, court costs, judgments, settlements, and lost income.
Why Go With E&O?
E&O insurance helps businesses survive situations that might otherwise create a financial burden. Without it, businesses - especially small-to-medium size businesses, are at serious risk of bankruptcy and going out of business entirely. A simple disagreement with a client can quickly spiral out of control into a costly lawsuit.
Can’t I Just Negotiate?
It’s tempting to rely on your interpersonal skills to avoid legal issues and financial problems. Some business owners figure if someone ever files a lawsuit against them, in other words, they’ll simply try to sit down together and talk it out. However, the U.S. Small Business Administration (SBA) did a study that found mixed results from negotiation. The main reason was that even when one party strongly preferred to avoid litigation, the other party refused to meet and negotiate. Sometimes a client or contractor just prefers to go to court, and that’s their right. Are you prepared for the fallout?
The impact goes beyond legal costs. While legal representation is costly, you’ll also need to take time away from your business to prepare documents, go to court, possibly lose business, and rearrange resources to keep your business on track. E&O insurance can help cover costs of lost business, and it can also ease the emotional burden of dealing with the situation. When you know you’re covered, it can be a huge relief during a stressful time.
Exceptions and Exclusions
Just like home and auto insurance policies, there are some things an E&O policy excludes. Crime can’t covered by an E&O policy - meaning if one of your employees omits important information due to fraud or theft, it may not be covered and you’d need to sue them to recover damages. However, losses due to simple human error are generally covered. So if your employee makes a math error that costs a client thousands of dollars, you are likely covered by your E&O plan.
Anything that happens outside the coverage dates won’t be covered. Seems obvious, right? But imagine that a longtime client sues your company for bad financial advice your company gave them 10 years ago, which led to their current bankruptcy. You realize that 10 years ago, you didn’t have E&O insurance. Are you covered now? It’s time to talk to your agent.
In addition, exceptionally high-risk businesses might not qualify for E&O insurance. Companies labeled high risk vary from provider to provider, but the list often includes businesses like adult entertainment services, nutrition and supplement websites, gambling services and software, and booking services for international travel.
E&O also excludes some particular liability situations, like intellectual property liability and cyber liability. Make sure you get additional coverage to minimize risk for your specific business.
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