A consultant recommends that a client purchase and implement software to automate certain manufacturing processes. An update to the software causes it to crash repeatedly, forcing the client to shut down its production lines for 10 days until a fix is available. The client sues the consultant for giving bad advice that caused the 10 days of lost production.
A new commercial building develops a roof leak following heavy rains. An investigation shows that the roof structure is insufficient for handling torrential rains common to the area. The owner sues the architect over the design error.
An accountant performing an audit for a town government does not notice a questionable pattern of expenditures. Later, it is discovered that an employee in the town clerk’s office embezzled more than $15,000 over a six-year period. The town sues the accountant for failure to detect the crime.
These are situations that can happen to any professional, which is why experts in all fields need Errors and Omissions (E&O) liability insurance. Also commonly referred to as Professional Liability Insurance.
E&O insurance protects professionals against financial losses resulting from their liability for errors and omissions they may make while performing their duties. It applies to many different types of mistakes professionals can make, such as project delays, failure to provide services, oversights, incorrect documentation, mismanagement of assets, and others.
Commercial general liability (CGL) insurance applies to liability for bodily injuries, property damage, and certain types of non-physical injuries and advertisements. It does not cover the types of losses that E&O insurance covers. For example, it would not apply to the lost production resulting from the crashing software because the property is not physically damaged. E&O insurance, which covers faulty professional advice, would apply.
Most professional firms cannot afford to pay legal judgments and settlements out of pocket. An error that shuts down production lines or closes a building for long periods of time can cost the client tens or hundreds of thousands of dollars. The cost of compensating a client for such large amounts is more than most firms can absorb.
Even those professionals who do not think they will make mistakes can benefit from E&O insurance. If something goes wrong, a client may sue anyone who had any part in the project, even those who are blameless. In addition to paying for any judgments or settlements, E&O insurance covers the cost of providing a legal defense against the claim. Often, defense costs exceed the amount of the loss itself, especially if the attorneys succeed in getting the suit dismissed.
Another reason to purchase E&O insurance is that it may be difficult to get work without it. Some businesses and government entities require professionals they hire to carry it. Those who lack this coverage may not be permitted to bid on projects, or they may not be awarded projects on which they bid.
E&O insurance helps protect professionals against legitimate and frivolous lawsuits, fills gaps left by CGL insurance, helps them obtain work, and enables them to cover the costs of human mistakes. It is a smart purchase for every professional firm.