Definition of Errors and Omissions Insurance
A risk-management product that helps professionals limit their exposure to losses from lawsuits against their businesses that are brought about by a mistake an owner, employee, temporary worker or subcontractor makes in the course of performing their usual work. Errors and omissions insurance also protects a business against frivolous or malicious lawsuits brought by parties who haven’t really been harmed but who are looking for a payout or want to damage the company.
E&O insurance supplements general liability insurance and helps prevent financial loss by covering both legal fees and judgments if a business is sued. Without this type of insurance, many businesses would either be unable to defend themselves or would go out of business in the process because of the great expense associated with lawsuits.
Laura is a financial adviser, and her client, Katie, asks her to invest $100,000 in a low-risk exchange-traded bond fund. Laura is sleep deprived because she has a baby that wakes her up throughout the night, and she mistakenly invests Katie’s money in a high-risk emerging market fund. Katie’s investment declines to $50,000 when there is new political turmoil in the region the fund invests in, but Katie was expecting to earn a small return and withdraw her money to pay for a house. As a result, she sues Laura for her mistake in order to get her money back. Laura’s errors and omissions insurance covers the loss.
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Tips From First Foundation
All types of professionals stand to benefit from carrying errors and omissions insurance if they make a mistake covered by the policy. However, some professions entail a greater risk of making serious, lawsuit-inducing mistakes than others. These professionals include financial advisers, real estate agents, mortgage brokers, engineers and other professions where clients’ safety, health and/or money are at risk.
Insurers tailor errors and omissions policies to meet the unique needs of each company. Policies can even cover work completed before a policy is taken out. E&O insurance is also called professional liability insurance or professional indemnity insurance. The law requires it for some professions; in other cases, a client will require it; and in many cases, it makes good business sense to carry E&O even when it isn’t required.