Who Needs E&O Coverage?
E&O Insurance is supplementary liability insurance that enhances any business owner’s policy by safeguarding against catastrophic loss in the event of a lawsuit due to a negligent act, error or omission by the professional. In addition to claims of error, omission, or negligence, an E&O policy can also protect against slander, libel and breach of contract. Curious as to who would need Erros and Omissions Insurance, and why they would want this protection? Robertson Insurance & Risk Management asks you to think about these situations:
Real Estate Errors & Omissions
Buyers of a property contended that misrepresentations were made regarding its square footage. The allegations were that the property was listed by a real estate agent as having 1,682 square feet when, in fact, it was only 1,352 square feet. The buyers made a monetary demand against the real estate agent for the diminished value of the property resulting from the square footage discrepancy.
Consultation Liability
A commercial auto parts distributor (“the client”) hired a management consultant to evaluate and make recommendations to improve staffing, budgeting and executive decision-making. The consultant subsequently implemented a reorganization strategy. The strategy redefined management’s roles, implemented spending controls and introduced a new staffing model. Eighteen months after the reorganization, the client alleged that the new strategy ultimately resulted in a negative impact on profitability. The client sued the management consultant for negligence, seeking compensatory damages and lost profits.
Not Meeting A Client’s Expectations
A software company manufactures and distributes workforce management software that allows third parties to track employee hours, overtime, vacation time and compiles information for payroll processing. The software company enters into an agreement to provide the software to a customer, including implementation, installation, customization, training and support services.
Situation: Six months after installation, the customer is not happy with the performance of the software program, specifically alleging a functionality failure. The customer agrees to allow the software company a six-week period to cure the default.
Challenge: After this time period elapses without a satisfactory resolution, the customer terminates the contract due to negligence and failure of the product to perform as intended. Damage allegations were in excess of $700,000. Claim expenses: $50,000 Damages: Settled for $250,000.
Cyber Liability
A systems integration company provides hardware and software integration services.
Situation: When uploading a new software program for a customer, a malicious code is inadvertently transferred to the customer’s network, causing widespread loss of data and disruption to the customer’s operations. In the download process, the virus spreads to the client’s computer system, resulting in widespread loss of data and a computer network shutdown.
Challenge: The customer seeks damages for the costs to reconstruct the data, as well as the financial impact associated with the disruption of business operations. Resolution Claim expenses: $35,000 Damages: $400,000.
It is appropriate coverage for anyone who gives advice, makes educated recommendations, designs solutions, or represents the needs of others. Service professionals, such as accountants, computer consultants, software developers, planners, architects, real estate agents, contractors, etc., are prime candidates for carrying E&O insurance.
Specialized forms of E&O coverage are also available to professions such as appraisers, real estate agents, insurance agents, home inspectors and notaries. Policies are designed to cover the large legal defense costs that are incurred trying to prove liability or innocence. They also ultimately cover the final judgment if the business owner does not win the lawsuit.
E&O Policy Overview
E&O coverage kicks in where your commercial General Liability Insurance policy does not provide coverage, such as for service errors, contract performance disputes or any other professional liability issues. These policies also include defense costs, which can be quite substantial even if liability is not found. Policies typically do not provide coverage for non-financial losses or for intentional or dishonest acts.
Count On The Experts
There are many different forms of professional liability insurance and multiple factors to consider when purchasing E&O coverage for your business. Because there is not a standard policy, Robertson Insurance & Risk Management – your local, experienced, professionals – understands your company and can knowledgeably design a policy to meet your needs. Begin protecting your professional reputation today! Contact our experts to learn how E&O Insurance fits into your total risk management program.
Manufacturers E&O Insurance For PA And The Mid-Atlantic
Consider this scenario: A customer asks your company to manufacture a part according to certain specifications, which were outlined in a contract. He needs to add the part to his product and ship it to his customers by a set deadline.
Your company creates the part, but due to an error that occurs during the production process, the part isn’t made to the customer’s specifications. He receives the part, realizes he can’t use it in his final product and requests that the part be remade. The delay in production causes him to miss the deadline to ship the final product to his customers, so he files a lawsuit against your company for the financial loss. Now what?
Exclusions In General Liability Insurance
You might assume that your Commercial General Liability (CGL) policy will cover this claim, but in many cases it will not. Most CGL policies contain “damage to impaired property” and “property not physically injured” exclusions. That means that unless the manufacturing error results in bodily injury or property damage, the CGL policy will not cover the loss.
The customer’s financial loss in the scenario described above would not fall into either of these two categories, so it would not be covered under a typical CGL or products liability policy. In order to protect your business from a product failure resulting in a third party financial loss without bodily injury or property damage, you will need to add Manufacturers Errors & Omissions (E&O) coverage.
Manufacturers E&O Insurance
Manufacturers E&O is liability insurance that covers a manufacturing mistake or negligent service that results in a third party financial loss without bodily injury or property damage. E&O insurance covers damages that result from:
- Poor, incorrect or faulty products that you manufacture, handle, sell or distribute
- Errors and omissions when caused by material defect, including property damage to the product, property damage to the work and property damage to impaired property
- Negligence or failure to deliver promised services
If customers allege that your product failed or that you were negligent in performing services outlined in a contract, they will likely seek to recoup their financial losses by suing you. You would be saddled with significant legal costs, as well as potential damages if the case is lost. Even if the customer’s lawsuit is found to be frivolous, you’d still incur the cost of defending yourself. That’s where Manufacturer’s E&O insurance comes in.
Your policy will cover both the customer’s financial loss and your defense costs. Most E&O policies are “claims-made policies,” which means that in order for the claim to be covered, the work in question must be performed and the claim must be made during the policy period.
E&O premiums vary based on the type of product or service you need coverage for, your company’s financial stability and the policy’s limits. Contact Robertson Insurance & Risk Management today to learn more about adding this important coverage to your risk management portfolio.