What is errors and omissions insurance? A comprehensive guide for professionals

In today’s fast-paced business world, mistakes happen. But when those mistakes cost your clients money, you could find yourself in hot water. That’s where errors and omissions (E&O) insurance comes in. If you offer professional services or advice, E&O insurance isn’t just a nice-to-have — it’s a must. In this article, we will break down what exactly errors and omissions insurance is and learn why it matters to you and your business.

What is errors and omissions insurance?

Errors and omissions insurance, also known as professional liability insurance, is a type of coverage that protects businesses and individuals who provide professional services or guidance. This insurance policy is your safety net when a client claims that your work caused them financial harm due to mistakes, oversight, miscommunication, or negligence. And even if you aren’t guilty of the accusations, defending your business will still cost you time and money — and E&O can help. 

In the medical and legal spheres, E&O insurance is called malpractice insurance. Just as doctors need protection against medical malpractice claims, professionals in various fields need coverage against claims of negligence, errors, and mistakes.

Who needs errors and omissions insurance?

There are many different professional fields that would benefit from this policy. You can think of it this way: If a client of yours could potentially sue you for misrepresentation, negligence, inaccurate advice, professional mistakes, or inadequately provided services, E&O insurance is for you.

Here are a few of the different types of professionals that would benefit the most from E&O coverage:

• Consultants
• Lawyers
• Accountants
• Tax preparers and bookkeepers 
• Real estate agents
• IT professionals
• Architects and engineers
• Marketing and advertising professionals

Essentially, if your job involves giving advice or providing a service that your clients rely on, you should seriously consider E&O insurance.

What does errors and omissions insurance cover?

Here are a few of the different scenarios in which an E&O policy can protect your business:

• Negligence: If a client suffers financial loss due to your professional mistake or oversight.
• Misrepresentation: Intentionally giving incorrect or incomplete information to a client.
• Violation of good faith: Failure to deliver on promises you made to a client.
• Inaccurate advice: If you provide inaccurate professional recommendations that lead to a client’s financial loss.
• Legal defense costs: Even if a claim against you is groundless, E&O insurance can cover your attorney fees and other defense costs.
• Settlement costs: If you decide to settle out of court for an errors and omissions-related case, this policy will cover the settlement payment.
• Court-ordered payments: If a judge orders your company to pay damages to affected parties due to a professional mistake, misrepresentation, or negligence, your E&O insurance can help cover the court costs.

What doesn’t E&O insurance cover?

We now know that E&O insurance coverage protects against legal costs, settlements, and court fees for claims related to mistakes made by professional service providers. But what doesn’t it cover? 

• Illegal acts or intentional wrongdoing: E&O insurance won’t protect you from claims of fraudulent, illegal, or intentionally deceptive actions. 
• Bodily harm and property damage: An E&O policy is designed to cover financial losses, not physical injuries or property damage. For this type of coverage, look into getting general liability insurance.
• Cyberattacks and data breaches: If your business stores sensitive client information and experiences a cyberattack or data breach, E&O insurance won’t cover the costs. To protect against these risks, you’ll need a separate cyber liability insurance policy.
• Employee work-related injuries: E&O policies do not cover costs related to workplace injuries or illnesses. For this type of coverage, you’ll need workers compensation insurance.
• Employment issues and claims: Lawsuits related to issues like wrongful termination, discrimination, or workplace harassment fall outside the scope of E&O insurance. Instead, these claims are covered by employment practices liability insurance.

E&O vs. general liability insurance: What’s the difference?

While both E&O and general liability insurance protect your business, they cover different types of risks:

• E&O insurance focuses on financial losses due to your professional services or advice.
• General liability insurance covers bodily injury, property damage, and personal injury claims.

For example, if a client slips and falls in your office, that’s a general liability claim. But if a client loses money as a result of heeding your professional advice, that’s an E&O claim.

Many professional services businesses need both types of coverage for comprehensive protection.

Why E&O insurance is crucial in today’s business landscape

In our increasingly litigious society, the importance of E&O insurance cannot be overstated. Here’s why:

1. Rising lawsuit costs: The cost of defending against a lawsuit, even a frivolous one, can be astronomical.
2. Client expectations: Clients today have higher expectations and are more likely to sue if those expectations aren’t met.
3. Complex business environment: As business operations become more complex, the risk of errors increases.
4. Contractual requirements: Many clients now require proof of E&O insurance before they work with you.
5. Peace of mind: With E&O insurance, you can focus on your work without constantly worrying about potential lawsuits.

Even if you operate with the utmost care and professionalism, mistakes can happen. Unfortunately, mistakes can often lead to costly legal disputes. Without E&O coverage, you could be liable for paying legal fees and settlements out of pocket, which can be financially devastating. 

How to choose the right E&O policy

Selecting the right E&O policy involves several considerations:

1. Coverage limits: Many policies allow you to customize your coverage limits. Ensure your policy limits are high enough to adequately protect your assets.
2. Scope of coverage: Make sure the policy covers all the services you provide.
3. Claims-made vs. occurrence: Understand whether your policy covers claims made during the policy period or incidents that occur during the policy period. In the case of claims-made, the event and the claim must have occurred during the active policy period. In the case of occurrence, only the event must have taken place during the active policy period.
4. Deductible: This is the amount of money you would pay before the insurance carrier starts paying for covered expenses. Choose a deductible that you can comfortably afford in the event of a claim.
5. Exclusions: Carefully review what’s not covered by the policy.
6. Retroactive date: If possible, get a policy with a retroactive date that covers past work.

It’s often helpful to work with an insurance broker who specializes in professional liability insurance. They can help you navigate these choices and find a policy that fits your specific needs.

How much does E&O insurance cost?

As you might expect, the cost of E&O insurance varies from business to business, depending on a number of different factors. That said, most professionals pay between $500 to $1,500 per year. Businesses that need to insure multiple employees will generally pay between $500 and $1,000 per employee.

Here are some of the main factors that affect the cost of errors and omissions coverage:

• Industry
• Location
• Annual revenue
• Company size/number of insured employees
• Claims history
• Experience
• Policy terms (deductible, limits, etc.)

Real-world examples of errors and omissions claims

To better understand how E&O insurance works, let’s look at a few scenarios:

1. IT consultant: In 2012, a hospital in North Dakota sued a healthcare technology company called Cerner Corporation. The hospital alleged that Cerner’s patient accounting software did not function correctly, which led to financial losses. The parties settled the case for $106 million.
2. Financial advisor: In 2024, a lawsuit was filed against three financial advisors who convinced a client with dementia to invest $2 million in annuities unsuitable for his situation. The client’s widow, who filed the lawsuit, claimed that the advisors failed to act in her husband’s best interest.
3. Healthcare worker: In 2017, a nurse mistakenly gave a patient a paralytic instead of a sedative, which ultimately led to the patient’s death. She was convicted of criminally negligent homicide in 2022 and sentenced to probation.
4. Lawyer: In 2024, Swan Bitcoin sued their law firm, Gibson, Dunn & Crutcher, for legal malpractice. The lawsuit claimed the firm improperly tried to withdraw from a federal trade secrets case, citing conflicts of interest and unpaid fees.

In each of these cases, E&O insurance could step in to cover legal fees and any settlements or judgments against you, potentially saving your business from financial ruin.

You can read about other cases on our blog, 5 professional liability claims examples, which delves into real-life scenarios involving a real estate agent, an accounting business, and other professional service providers.

Protect your business from errors and omissions

Mistakes can happen to even the most diligent and skilled professionals. E&O insurance is a crucial safety net that protects your business from the potentially devastating financial consequences of a lawsuit. For professional service providers such as lawyers, doctors, and accountants, this coverage is an absolute must.

Looking to find the right coverage for your business? Navigating different policies and insurance companies is not an easy task. This is where Embroker comes in. Sign up and get a quote today for insurance solutions tailored to the needs of your business.