Comprehensive Errors and Omissions Insurance Guide for Emerging Businesses

Introduction – Errors Omissions Insurance

With the constantly evolving world of rules and laws that affect how professionals practice at their workplace, and the ever-present threat of litigation when deals go bad, its not surprising that there is a thriving business in providing what is called Errors and Omissions Insurance (EO). Errors and Omissions Insurance is available for hundreds of professions across Ontario, Canada.

This type of insurance is designed to lessen the vulnerability and costs associated with mistakes or failure to deliver by a given professional.

Some of the confusion about Errors and Omissions Insurance, however, tends to be in its application. Given that the insurance is so technical and specifically contract-related, parties involved need to research if it is applicable to their needs. This raises an assortment of questions from the simple to the complex.

  • What in the world is Errors and Omissions Insurance in the first place?
  • Do I really need the coverage or is just a default thing I need to do?
  • Do I need to have a specific criteria met for Errors and Omissions Insurance?
  • Do I buy it before contracting or afterwards?
  • And finally, where is the best place to find Errors and Omissions Insurance that fits my agreement?

Errors and Omissions Insurance is a coverage and risk-offset to agreements you enter into and is generally associated with business. This insurance protects your business or the individual, depending how its written. If you’ve written a contract where you’ve provided a service and either failed to meet a term or did not provide the service in the way that was expected/promised, then this insurance provides protection from lawsuit.

In the legal and medical world Errors and Omissions Insurance is better known as malpractice insurance. In terms of actual protection provided, Errors and Omissions Insurance offsets costs associated with court decisions, settlements and attorney expenses to protect from such lawsuits. The fact is, you can still lose money even if the plaintiff party is proven wrong and cant make a case. Thousands of dollars can be spent just on attorney costs alone.

Who Needs Errors and Omissions Insurance?

Errors and Omissions Insurance is best known in its malpractice name with titled professionals. These include lawyers, CPAs, engineers and basically anybody who carries a license to practice their skill on a professional basis. That said, any business can benefit from having Errors and Omissions Insurance if designed the right way.

Whether it be an interior designer or a landscaper, a misrepresentation can effectively kill a small business with legal costs. And the costs don’t stop with just the attorney fees; expenses can also tally up in actual damages paid out, credit loss, cash flow loss, deferred opportunities due to loss of resources and possibly a loss of reputation due to bad press and attention. Remember, legal actions are public record. Depending on the type of business you’re in, this can in effect be like airing your dirty laundry for all to see.

Why does My Company Need Errors and Omissions Insurance?

No matter how many detailed business processes a company puts in place, no matter how much training you give your personnel, somewhere somehow a detailed mistake will happen, be omitted, or written wrong. And that creates the catalyst for an argument later that the agreement did not perform as expected or was promised. Call it the human error factor. For instance, if a shipper creates a time sensitive agreement to move freight and has a deadline of COB (close of business) Friday, it may seem like a clear instruction. Nobody has an intent to cheat the other and everybody involved expects the delivery on Friday at the end of the day. However, if the shipper is sending freight from the Canada to England by COD Friday, the issue becomes a bit more complicated.

Whose Friday and close of business clock is applicable if not specified in the agreement? The time difference between England and the Canada can be six to twelve hours difference. One partys Friday could be another partys Saturday. Ergo the room for a mistake just following the written terms of the agreement. Now the shipment arrives late and the deadline expected in England is missed. A client loses a big business deal and the damage skyrockets to thousands of dollars in lost business. The client is going to be quickly looking for a way to make up that loss. Enter the lawyers. A reputation is not quickly thought of in terms of damages but it can be just as much a significant loss as business dollars.

Why? Reputation is what brings back return business and creates referrals. That translates to ongoing sales and revenue. However, when a deal goes bad reputation can suffer from public perception due to litigation and similar hassles. Somethings wrong with that company. They were cheating and got caught. Rumors spin and soon enough sales drop because perceived trust in service delivery is gone. So if a company is taking a large part of its business from providing services, EO insurance makes a lot of sense to be prepared.

When Should You Buy Errors and Omissions Insurance?

Insurance only does its best when you have it in place before the risk or vulnerability occurs. It wont do you any good after the fact and most insurers will avoid covering pre-existing conditions in known. For this reason, Errors and Omissions Insurance becomes an operating cost for many service businesses, or a necessary expense. And in some cases clients wont do business with you unless you have the coverage already in place. They want to know there is some kind of recourse if things go bad in the deal.

Where do You Find Errors and Omissions Insurance?

Errors and Omissions Insurance, unlike some more common insurance packages, is not produced in a standard, cookie-cutter format. This is due to the fact that the coverage is almost always tailored to the specific agreement or service being provided to a client. As a result, the insurance involved is as unique as the service. No two are exactly alike. These insurance policies are usually available from specialty insurance brokers such as LiabilityCover and agents who are trained and well-experienced in the specific needs of Errors and Omissions Insurance.

It is not uncommon to have specialists that tailor and serve only lawyers or only doctors or only real estate brokers. The field is large enough that niche specialties can be developed and run successfully. The actual cost of an Errors and Omissions Insurance policy also varies as much as the construction of the policy. Again, the cost drivers can be very different from policy to policy and the risks involved. These factors can include the type of business, where the service occurs, the past experience of litigation in the particular risk area, the risks the insurance company is willing take on, and a number of other factors defined by the insurance provider. The more unique the specialty or service covered, the less likely there is to be competition and competitive rates.

Inversely, a field such as coverage for lawyers or real estate brokers will have a lot of providers and as such a more competitive cost per policy. In general, the more a provider understands your business and the extent of risks involved, the better they can craft a policy for your needs and at a price that works for your budget. Application criteria can vary greatly from provider to provider. Some insurance sellers want to see all the operating elements of the business to be covered. Others simply want to have a completed policy application filled out and references checked. Most providers will definitely check to see that the business to be covered does not have a long history of claims. This can signal a significant bad risk.

Typical costs ways to save on Errors and Omissions Insurance

The actual expense of Errors and Omissions Insurance policies will fluctuate, again, due to the type of coverage offered and the risks involved. Generally speaking, monthly premiums will run somewhere between 2 to 3 figures per month for each individual covered if associated with a personal service. Group coverage can be worked out via discount pricing for large groups, where the overall group premium offsets the potential risk cost for one individual.

Over time, the rates price better as risk is minimized and a track record of revenue is established for the provider. In some cases, applicants can reduce the monthly cost of coverage by their own actions. Premiums can be lowered or discounts made eligible by companies implementing risk reduction practices within their own business and making their providers aware of these efforts. Risk reduction can vary from using forms and agreements recommended by the insurance provider to providing employee training and preventative tools to avoid problems before they occur. The bottom line effect will equal or be close to a 5 to 10 percent discount in the monthly premium of an Errors and Omissions Insurance policy for every six practices that are put in place to reduce the covered risk. That may seem small, but in the aggregate for the entire year, the reductions add up. The net result could come closer to 15 to 50 percent discounting off the total annual premium charged.

The bottom line effect will equal or be close to a 5 to 10 percent discount in the monthly premium of an Errors and Omissions Insurance policy for every six practices that are put in place to reduce the covered risk. That may seem small, but in the aggregate for the entire year, the reductions add up. The net result could come closer to 15 to 50 percent discounting off the total annual premium charged.

To read more about E&O insurance, go to http://www.liabilitycover.ca

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