General liability policies specifically exclude claims arising from professional services, so any business engaged in such services should consider a professional liability policy to properly protect their business. However, business owners may not realize that not all errors and omissions (E&O) policy forms are created equal and there is no such thing as a “standard” policy. The coverage is highly specialized and it is important to work with a broker who understands your industry and how to tailor such policies to suit your needs.
Smart Business spoke with Steve Rivera, an assistant vice president at Momentous Insurance Brokerage, Inc., who shared some insider tips to help businesses evaluate whether their E&O coverage is protecting them correctly.
What is E&O insurance?
E&O insurance, more commonly referred to as professional liability or malpractice insurance, covers your company, or you individually, in the event that a client holds you responsible for an error or omission in the service you provided, or failed to provide. In addition, E&O insurance can also protect your business from allegations of libel and slander.
Who needs this protection?
Anyone providing a professional service, for example doctors, lawyers, real estate and insurance agents, accountants, software designers, educators, architects, engineers, contractors and consultants.
What is important to look out for?
Making sure that the services you render are covered by the policy. If you are like most businesses, you are constantly evolving and finding new ways to service your existing client base or attract new clients. Have you recently rolled out a new service offering? If so, have you contacted your insurance broker to notify them and asked how it may impact your E&O policy? If not, you are running the risk of operating with a gap in coverage on your E&O policy and could experience unforeseen expenses because of an uncovered claim, which can severely hinder your business or even worse, put you out of business.
How are E&O policies responding to website and social media activities?
If your company has a website or a social media presence, it is important to speak with your broker about adding coverage on your E&O policy for these exposures. Many policies exclude Web-related activities, leaving you unprotected against claims. If your company transacts sales over your company website, you are liable for client information, such as credit card numbers, in the event your website is hacked and personal information is accessed.
Why is it important to know if your defense costs are inside your limit of coverage?
Most E&O policies include coverage for defense costs, which pays for legal and administrative expenses associated with defending a claim, regardless if the suits are baseless or contain merit. The defense costs can be staggering and can erode your policy limit, which may mean that if limits aren’t sufficient, you pay out of pocket. Let’s say, for example, that the total losses to be paid as a result of a covered claim are $1 million in damages and $300,000 defense costs, for a total claim of $1.3 million. If you have a $1 million dollar policy limit, and defense is inside that limit, then $1 million is the most the insurer will pay and anything above that limit is your responsibility. It is advantageous to the policyholder to seek defense costs coverage outside the policy limit, whenever available.
How can you tell if E&O limits are adequate for a business operation?
There are a few ways to do so, including evaluating the company’s revenues and benchmarking against peer institutions. Unfortunately, there is no magic formula and there is no way to predict just how big an E&O claim can be, so the best thing a business owner can do is to work with a broker that specializes in this type of coverage.
Does E&O cover international operations?
More and more businesses are able to service clients all over the world, and it is imperative that their policy’s coverage territory is defined as worldwide. Not all policies will come standard with worldwide coverage.
Steve Rivera, CLCS, is assistant vice president at Momentous Insurance Brokerage, Inc. Reach him at (818) 574-0894 or email@example.com.
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