If you own a company, errors and omissions insurance protects the company if a client holds you responsible for errors, and wants to make a claim or file a lawsuit. It also protects you if you failed to perform the work promised in your contract with the customer.
This coverage would pay for things like legal defense costs should you have to hire an attorney–which 99% percent of the time if you’re in this situation, you’ll have to. You may even have to obtain legal representation even if the allegations against you are completely false. That’s precisely why you should carry this insurance. If someone makes a claim against you and sues you, and the court rules in their favor, you could be left with the responsibility of paying back a lot of money; money you may not have. Additionally, you could be looking at your company being uprooted, and have every asset and possibly even future assets taken if you don't have enough to cover the amount that the court ordered you to pay. Of course, there are limitations on your policy, so you would only have legal defenses covered up to whatever amount your policy states.
This coverage can be bought by both W2 employees and 1099 subcontractors, and the policy can be broadened to a worldwide level.
Other than the fact that you could stand to lose everything you own if you were sued for an error, there are plenty of reasons you should purchase this coverage. Many people think a General Commercial liability policy will cover this, but don’t be fooled–it is absolutely not provided by that kind of policy. Commercial liability policies don’t cover errors, contract performance disputes, or other professional liability issues.
Businesses who fail to obtain professional liability insurance like errors and omissions insurance are taking a very big risk. It’s comparable to a doctor practicing medicine without having a malpractice policy in place. We’re all human, and we all make mistakes. This insurance is no different than medical malpractice insurance in the way it works. If a doctor were to prescribe a medication to a patient that has a severe allergy to it, but he didn’t see that when he prescribed it, and the results were fatal, that doctor could be sued. Think of your service or product like a medication you’re prescribing your customers, and make sure you’re not missing anything that could cause an error.
It's just reality. People make mistakes and every company on the planet has made a mistake at some point. It's impossible for you to be everywhere at one time, and sometimes you can't handle every aspect of your job personally. If for no other reason, buy the policy to make sure that you're protected in case your employees make a mistake, as an errors and omissions policy will extend coverage to your employees and independent contractors as well.
It’s typically recommended that you purchase errors and omissions insurance to act as the foundation of the insurance portfolio that any company carries. It should basically be considered a coverage that you just assume you need, similar to the way you’d automatically think to buy auto insurance if you bought a car.
Generally speaking, it’s best if you buy errors and omissions insurance before you even have your business’s product or service launched, and before you even begin serving or gaining customers. Often, you may have to buy the errors and omissions insurance anyway, as some investors typically require that you carry it.
Having errors and omissions insurance may not only save your livelihood and assets, it can prevent you from embarrassment and lost clients. Worst of all, it could leave you with a bad reputation that you may never be able to get back.
-Desiree Baughman, InsuranceQuotes.org, @DesireeDB