If clients pay you for your knowledge (advice, recommendations, design, planning or a professional service), you can be held responsible when a mistake costs them money. Errors and omissions (E&O) insurance, also called professional liability, pays to defend those claims and, if you’re found responsible, the damages. A general liability policy usually won’t, because it’s written for injury and physical damage, not financial loss.
Who needs it
A lot of the business owners I work with built their companies on what they know. They consult with clients, make recommendations, design solutions or act on someone else’s behalf. Any time you’re giving advice or doing work someone relies on, there’s a chance of an error, or of a client believing you made one.
Businesses that commonly carry E&O include:
- IT and computer consultants, software developers
- Management, HR and sales consultants, business coaches
- Event planners, marketing and design firms
- Interior designers
- Home inspectors
- Bookkeepers and other professional service businesses
Some professions are required to carry it by their regulator or professional association, and many commercial clients now ask for proof of E&O before they’ll sign a contract.
A simple example
Here’s the kind of claim E&O is built for. This is a hypothetical, but it’s typical.
An Ontario event planning firm is hired to run a trade association’s annual convention in Toronto. The firm sends out printed programs with the wrong speaker times and session topics. Every program has to be reprinted and mailed again, and the association runs up significant printing and postage costs.
The association sues the firm and its owner to recover those costs. Nobody was hurt and nothing was physically damaged, so the firm’s general liability policy isn’t likely to respond. Its E&O policy is the one designed for this: a claim that a professional error caused a client a financial loss.
Depending on the wording, E&O can cover defence costs, settlements and judgments for errors, oversights, negligent advice and disputes over whether the work was done as promised. Defence costs alone can be significant, even when the claim has little merit.
What to look for in an E&O policy
- Claims-made wording. Most E&O policies respond to claims made while the policy is in force, not when the work was done. Keep coverage continuous, and know your retroactive date (the date before which past work isn’t covered).
- Defence costs inside or outside the limit. If defence costs come out of your limit, a long lawsuit can use up the coverage before there’s a settlement.
- What counts as your professional services. The description of your business on the policy should match what you actually do. If you’ve added services since you bought the policy, tell your broker.
- Limitation periods. In Ontario, a client generally has two years from discovering a problem to sue, and up to 15 years from the work itself in some cases. A claim can arrive long after the job is finished, which is another reason to keep coverage continuous and think about what happens when you retire or sell.
Where your business and family overlap
E&O is often a family question as well as a business one. In many owner-run businesses, a spouse is a director, a partner, or quietly helps with client work. If a client sues, they’ll often name the company and every individual they think was involved.
A few things to check:
- Is your spouse covered? If they’re a director, partner or give advice to clients, make sure they’re included as an insured on the E&O policy, not just the company.
- Your home policy won’t help. Personal liability on a home policy generally excludes business and professional activities, so a claim against your spouse for business work won’t be picked up there.
- Personal assets. If the business is a sole proprietorship or partnership, a professional liability claim can reach personal assets, including the family home. Incorporating changes some of that, but individuals can still be named personally for their own professional errors.
- Umbrella limits. A personal umbrella usually excludes professional liability, so it won’t sit on top of your E&O. If you need higher E&O limits, that’s arranged on the business side.
Looking at the business policy and the family’s personal policies together is the easiest way to see whether everyone who could be named in a claim is actually covered.
Next step
If you give advice or provide a professional service and want to know where you stand, book a review and we’ll go through it together.
Common questions
What's the difference between E&O and general liability?
General liability responds to bodily injury and physical property damage, like a client tripping in your office. E&O responds to financial loss caused by your professional work: bad advice, a missed deadline, an error in a design or report. Most service businesses need both.
What does claims-made mean?
Most E&O policies are claims-made, which means the policy in force when the claim is made is the one that responds, not the policy in force when the work was done. If you let coverage lapse or switch without continuous coverage, you can lose protection for past work. Ask about the retroactive date on your policy.
Do I need E&O if I have a good contract?
A good contract helps, but it doesn't stop a client from suing. Even a claim with no merit can be expensive to defend, and defence costs are often the biggest part of an E&O claim.
Does my spouse need coverage if they help in the business?
If your spouse is a director, partner or gives advice to clients, they should be named or clearly included as an insured on the policy. Check the wording, because some policies only cover the company and listed individuals.