Who Needs Errors and Omissions Insurance?

9975002Errors and omissions insurance (E&O) is a type of professional liability insurance that protects companies and their workers, or individuals, against claims made by clients for inadequate work or negligent actions. Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract.

E&O insurance covers situations that traditional liability insurance policies do not cover. People should have errors and omissions liability insurance if they provide a service for a fee. If they don’t perform the service correctly or don’t deliver on time, the effects could cost a client. In these cases, E&O insurance coverage is essential.

Insurance Agent Scenario

Karen Jones is a licensed insurance agent who places her own auto coverage through the agency in which she works. The agency owner doesn’t know that Karen also places vehicles owned by her relatives on her own auto policy because the agency waives commissions for employees. When one of Karen’s uncle’s vehicles is stolen and he files a claim, the auto insurance carrier denies coverage because Karen Jones, the insurance agent and named insured, does not have an insurable interest in the vehicle. The carrier rescinds coverage back to inception for the vehicle.

What happens when Karen’s uncle brings an Errors and Omissions (E&O) claim against the agency?

Scenario Answer:

The E&O carrier would consider this a liability claim and pay Karen’s uncle. However, the agency not only has to pay its deductible, but also must live with this claim on its loss history. It’s likely that Karen’s employment will be terminated and that she will lose her insurance license. In the future, the agency owners will remind employees who purchase coverage through the agency must purchase that insurance through another employee—who has no interest in covering the property—who will manage the account.

Coverage Varies by Company

Insurance agents and brokers, registered investment advisors, financial planners and other financial professionals can obtain E&O insurance. Regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA), or company investors often require E&O insurance. The benefits an E&O insurance policy provides can vary greatly depending on the policy and issuing insurance company. E&O insurance may, or may not, cover temporary employees, claims stemming from work done before the policy was in force, or claims in various jurisdictions.

As an insurance agent or broker shopping for E&O insurance for your clients, remember that not all policies are created equal. E&O coverage is based on the client’s needs, risk level, and business budget.

Liability limits and deductible amounts will vary between insurance providers. And, some policies might exclude certain coverage types. To find the right policy, get quotes from multiple insurance carriers and compare terms. Make sure you understand all parts of the policy before presenting it to your client.

Want to know more about E&O coverage? Check out our Errors and Omissions offering in our Insurance Continuing Education Course Catalog.

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