07/ 18/ 2006
by Scott Westcott
Does your business need errors and omissions insurance coverage? It's a question you should ask yourself to make sure you're protected against claims that might not be covered by general liability insurance.
Also known as professional liability or malpractice insurance, errors and omissions insurance covers you or your company in the event that a customer or client holds you responsible for a faulty service you provided (errors)—or failed to provide altogether (omissions).
For many professionals such as doctors, dentists, chiropractors, lawyers, accountants, architects or engineers, E & O insurance is essential. All of those professions have one thing in common: Making a mistake in a service provided or failing to provide an important service could lead to significant physical, emotional or financial harm to your clients.
But what if you run a retail store, a small manufacturing firm or a service business in which a mistake would probably not cause significant financial or physical damage? In those cases, E & O is a judgment call based on an assessment of your risk and potential exposure, says Stacy Andreas, a law partner specializing in insurance for the Kansas City, Mo., firm of Lathrop & Gage.
In general terms, Andreas says, the more service-oriented your business, the more likely that E & O coverage would be beneficial. "It comes down to how service-oriented your business is versus providing a pure product," she says. "But because the line between providing a product and a service can be blurred, even some manufacturing companies or product suppliers might want to consider this coverage if service is a key part of the business."
For instance, a small business that manufactures computer software could face risk if customers were not told essential steps for software installation that led to problems with their computers and, ultimately, their businesses.
What about retail stores? Again, it's a matter of assessing risk. Your average clothing store would likely have little E & O exposure. However, if you run a bridal salon where you do dress alterations and provide services related to the weddings, your exposure could be significantly greater if a mistake you make ruins a pricey wedding.
As for costs? "It totally depends on what the risks are, and what the business is," Andreas says. "We know that professional liability coverage is very expensive for doctors, lawyers or some other professionals. If you run a small store, you can probably get it for very little cost because the risk is not there."
Before You Buy
When shopping for E&O coverage, attorney Stacy Andreas offers these tips:
Customize the policy. E & O policies are not uniform. They are negotiable and often tailored to a specific business. It's essential to carefully review the policy and make sure you know what is covered.
Avoid overlapping coverage. Business owners often get a sense of security in knowing they have overlapping coverage--that is, coverage from different policies that would cover a certain type of claim. But Andreas warns that when more than one policy covers a certain loss, the result is often warring insurance companies, each of which claims that the other company is obligated to pay for the loss.
Get it reviewed. Have a lawyer with expertise in insurance or a trusted insurance advisor review your policy to make sure it covers your potential exposures and does not overlap with other policies.
Web Extras
Find a library of articles on business insurance in the "Insurance" section of www.NFIB.com/toolsandtips.
$142.2 Billion
That's the total cost of unintentional injuries at work in 2004, according to the National Safety Council. The best way to lower workers' compensation costs is to reduce the number of claims. Find tips on keeping your employees safe in the "Web Extras" section of www.NFIB.com/toolsandtips.
