July 19, 2004 by Glenda Wertz
Almost all agents have clients with errors and omissions (E&O) exposure and the most difficult job the agent may have is convincing the client that they have the exposure. After 20 years of selling E&O/EPL/D&O exclusively, I have found some simple answers to the clients’ questions that seem to work best.
This article addresses the most frequently asked questions about Errors and Omissions Liability. What is E&O? Who needs E&O? Why do you need E&O? When should you buy E&O? And, where do you find E&O that fits your needs?
What is E&O insurance?
Errors and omssions (E&O) is the insurance that covers your company, or you individually, in the event that a client holds you responsible for a service you provided, or failed to provide, that did not have the expected or promised results. For doctors, dentists, chiropractors, etc. it is often called malpractice insurance. For lawyers, accountants, architects or engineers, it may be called professional liability. Whatever you call it, it covers you for errors (or omissions) that you have made or that the client perceives you have made.
Most E&O policies cover judgments, settlements and defense costs. Even if the allegations are found to be groundless, thousands of dollars may be needed to defend the lawsuit. They can bankrupt a smaller company or individual and have a lasting effect on the bottom line of larger companies.
In short, E&O coverage provides protection for you in the event that an error or omission on your part has caused a financial loss for your client.
Who needs E&O insurance?
The best-known professionals who need E&O insurance are doctors, lawyers, accountants, architects, engineers, etc. However, less thought about individuals range from advertising agencies to commercial printers, Web hosting companies to wedding planners. If you are in the business of providing a service to your client for a fee, you have an E&O exposure. You may want to consider what will happen if the service is not done correctly or on time, and it costs your client money or harms their reputation.
Why does my company need coverage?
To put it very simply, everyone makes mistakes. Even with the best employees and the best risk management practices in place, mistakes will be made. No one is perfect.
If a freight forwarder sends a shipment to South America instead of South Africa and it is a time sensitive shipment and their client loses a sale and, therefore, hundreds of thousands of dollars, who will pay the loss?
If a wedding planner reserves the reception hall, the band, the caterers, etc. for May 22 instead of May 29 and everyone shows up except the wedding party and guests, who pays? And imagine the emotional distress caused to the bride if this were to happen!
There is also the less tangible loss of reputation for both the professional and his client. What will the cost be to the business that now has equipment in South America instead of South Africa? Will they lose future contracts with their current client as well as future clients?
By not purchasing E&O a company can be taking a serious financial risk. These types of losses are not covered under a general liability policy. And, as stated earlier, even if you are not at fault, litigation is both time consuming and expensive.
When should you buy E&O insurance?
As with any insurance, the best time
to buy an E&O policy is before the risk is taken. If you are in the service industry and you know you will have the exposure, make E&O insurance a part of your insurance portfolio. Many contracts with clients will require insurance to be in place. In some cases, it is a selling point with your clients. It gives them the peace of mind of knowing they will be compensated if there is an error or omission.
Where do you find E&O coverage?
There are no “standard” policy wordings for E&O coverage. Each policy must be read carefully to make sure that the coverage being offered fits your exposures. An attorney, a doctor and a computer programmer all have exposures; however, the same policy would not work for all. There is no “one size fits all” E&O policy.
Most E&O policies are written on a “claims made” or “claims made and reported” form. This means that any claims must be made or, in some cases, made and reported, within the policy period. These policies have a retroactive date that becomes very important. Claims that arise out of acts committed prior to the retroactive date will not be covered. The farther back the retroactive date, the more coverage provided.
Some policies also include the defense expenses within the limit of liability. Some will exclude punitive damages. The wording of these policies can vary greatly, and each policy must be read carefully to make sure the coverage fits the exposure.
This is why it is very important for retail agents to find specialty insurance professionals that understand the E&O coverage and marketplace. Different information may be needed depending upon the type of exposure.
The cost of E&O insurance may vary greatly depending on the class of business, location, claims experience (both of the individual insured and of the industry they are in) and from insurance company to insurance company. An insurance company that is very competitive on insurance agents or real estate agents, may not be competitive, or may not even offer coverage on business consultants, even if the consultant works with real estate or insurance agents.
An insurance company underwriter may ask for copies of contracts, a description of quality control procedures, documentation procedures, training procedures, etc. or they may want nothing more than a completed application.
The underwriter will not only look at your experience to see if you have had claims, but they will also try to determine the reason you haven’t had claims. Is it luck or are you doing something that prevents the claim in the first place? And if you have had claims, what steps have you taken to ensure that the same errors will not continue to occur?
Here are some steps you can take to mitigate claims:
• Always have a written contract that spells out what will be done, what will not be done and what the fees will be.
• Communicate throughout the job and keep the expectations realistic.
• Have quality control procedures in place and use internal and external audits to check them.
The more comfortable you can make the underwriter with your operation, the more likely they are to give you a competitive price on your policy and to provide the coverage needed.
Glenda Wertz is a financial services broker at American E&S, a specialty excess & surplus lines broker and MGA. She can be reached at (952) 563-0618, or by e-mail: Glenda_Wertz@aesbrokers.com.