Errors and Omissions Clause: Everything You Need to Know
An errors and omissions clause helps ensure that the company and its workers are protected against claims for inadequately performed professional services.3 min read
2. What Is Covered by Errors & Omissions Insurance?
3. What Should You Include in Your Company's Contracts?
An errors and omissions clause (E&O) included in your company's contracts helps ensure that your company and its workers are protected against claims or lawsuits made by clients for inadequately performed professional services, including errors, omissions, or failure to perform professional services.
What Is Errors & Omissions Insurance?
Error and omissions coverage ensures financial losses due to perceived errors or oversights of the insured party. Another term for errors and omission coverage is professional liability insurance (PLI), and it is similar to malpractice insurance used in the medical industry.
Businesses that need this insurance coverage are those that offer professional services to their customers, such as those in the financial, investment, and banking sectors, the legal industry, and real estate. There is also an increased need for errors and omissions coverage in the information technology industry, because IT affects the infrastructure of most businesses.
In addition, some regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA) might require a company to have E&O insurance.
What Is Covered by Errors & Omissions Insurance?
The benefits of your error and omissions coverage will vary depending on the policy and issuing insurance company. In general, most insurance providers cover judgments, defense costs, and settlements up to a specified amount.
However, when you select an insurance policy for your company, you should review the language carefully and verify that it specifies certain protections, such as:
- A duty to defend clause specifying that your insurance carrier must support you and provide an effective defense for your business. In most cases, the insurance company provides you with a qualified attorney instead of using one that you select.
- A hammer clause, also known as a “consent to settle” or “cooperation” clause, specifying that your insurance carrier must defend you in court even if a settlement opportunity is available. This clause should also specify that your approval is required before your insurer can settle a claim out of court. Note that this clause may limit your insurance provider's losses on the settlement amount through the date that you don't agree to settle.
- Tail coverage protects your company against mistakes or omissions that occurred during the coverage period, even if the claim isn't filed until after the policy expires. This extended coverage is particularly good if you change carriers. Some insurance providers offer “bilateral tail coverage,” which allows you to purchase tail coverage regardless of who canceled the policy.
- Prior acts coverage is like tail coverage but protects your company from claims filed during the coverage period, even if the events or actions that caused the financial loss occurred before the coverage period.
Because all insurance policies have a limit on coverage, depending on the size of your company, you might want to consider an umbrella liability insurance policy that covers any gaps in your errors and omissions coverage.
What Should You Include in Your Company's Contracts?
In addition to insuring your business with professional liability insurance, consider adding an errors and omissions clause to your company's contracts as a means of setting customer expectations. Errors and omissions clauses are most effective when prepared by a lawyer and supported with a professional liability insurance policy. This is because, even with a clear, well-written E&O clause, a customer can still claim that they suffered money damages and file a lawsuit and a court may find you liable for the loss.
Avoid including a broad or vague errors and omissions clause in your company's contracts. These clauses should be extremely specific to avoid misinterpretation. Many well-written errors and omissions clauses will include stipulations that:
- Limit the amount of damages the customer can claim against your company. For example, an error and omissions clause might specify that your business can't be sued for an amount greater than what was received for providing the services.
- Disallows lawsuits for perceived lost profits by the client. For example, in the information technology industry, if a client's website goes down because of an error your company makes or an action that your company does not take, the client might feel you are responsible for any lost profits they incurred during the period of time that their website was unavailable.
If you need help with errors and omissions clauses, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.