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Can you imagine a world in which businesses could be run without ever having to worry about mistakes being made?
In such a world, every client would be perfectly happy with the service they receive and every product would work exactly as intended.
But that’s not how the real world works. In our business reality, deadlines get trampled, contracts are breached, and clients and customers are often left disappointed when their expectations aren’t met.
Unhappy clients, especially those that have suffered damages as a direct result of your services, can often bring forward very costly lawsuits. And even if your legal team can prove that there was no actual wrongdoing on your part, defense costs related to a groundless lawsuit can present a significant financial burden. Claims stemming from professional errors and unsatisfactory outcomes can be financially crippling if your business doesn’t protect itself from these types of risks properly.
Errors & omissions (E&O) insurance, also known as professional liability insurance, serves to protect your company from financial risks that arise out of any claims of negligence, mistakes, omissions, misrepresentation, and more. You can get a professional liability insurance quote with Embroker in under 10 minutes. A preferred errors and omissions policy will cover both defense costs and settlements or compensation you may be ordered by the court to payout.
That’s why errors & omissions insurance is crucial for any business or professional offering services that require specialized knowledge or training and have certain state, industry, contract, or client standards that can potentially be breached.
The first thing that most business owners want to know about procuring an E&O policy is how much it’s going to cost them to be adequately protected. This can be a difficult question to answer.
Companies have different risk profiles, especially when comparing businesses that operate in industries that have wildly different exposures. Underwriters use complex formulas to determine your risk profile and errors and omissions insurance cost for each individual policy. However, there are specific factors they look at which correlate very strongly to the cost of your insurance.
Errors and Omissions Insurance Cost: What Affects It?
While it’s impossible to determine your exact premium without involving a licensed broker in the discussion, we can offer you insights on what businesses can expect to pay on average for their coverage and the factors that most commonly affect premiums.
On average, a small business can expect to pay between $500-$1,500 per year for E&O coverage. Larger companies and enterprises have considerably greater exposure and will have to pay more for coverage, usually between $500 to $1,000 per employee per year.
These are still very rough estimates, which is why it’s more important for business owners to consider and understand how individual aspects of their businesses will affect premiums. The cost of E&O insurance is based on many variables, including industry risk levels, coverage limits, business claims history, and business location.
Let’s take a deeper dive into how these and other factors can affect your premium:
Before settling on premiums, insurance providers will first consider your industry. Your industry often determines two very important factors: how likely you are to face claims and how expensive they can potentially be to resolve. Specific industries will have to pay a lot more to be insured. Historically, medical, architectural, and engineering companies can expect to pay the most for errors and omissions insurance, and the reason for this is simple—any mistake or omission these professionals make could potentially have catastrophic results.
The company’s location will influence its premium. Some U.S. states have minimum coverage requirements for certain industries, which means that businesses operating in these states will generally have higher insurance rates.
For example, Oregon and Idaho require lawyers to carry legal professional liability insurance, while 23 other states mandate that law firms must disclose to clients whether or not they are covered by an E&O policy. Similarly, most states will require medical practitioners to carry a certain minimum of medical malpractice insurance.
Additionally, businesses based in highly-populated urban centers such as New York City, San Francisco, and Los Angeles will usually have higher premiums. If your business spans multiple states, you can expect your E&O premium to vary based on regional and state insurance requirements.
The math here is relatively simple; higher limits usually mean you’ll pay a larger premium. How much coverage a business needs will depend on its unique risk profile. However, the typical individual limit is $1 million.
When you’re looking to secure errors & omissions insurance, it’s essential to understand how the coverage limits work. An E&O policy will typically have two types of limits: an occurrence limit and an aggregate limit:
- Occurrence Limit: This limit represents the largest possible amount that your insurer is willing to pay out for any single claim. This limits how much you can expect to receive for a single event, even if more than one party suffers damages from it and decides to sue.
- Aggregate Limit: This limit represents the largest possible amount that your insurance company is willing to pay out in total during the policy’s life.
Your insurer will ask you to provide proof of your yearly revenue before quoting you for an E&O policy. The way revenue affects premiums is also fairly straightforward. The more a business makes, the more it will have to pay for insurance. The reason for this is also simple. Companies that make a lot of money are more likely to attract lawsuits. And if they lose the claim or have to settle it in court, they’ll typically have to pay more than a small business that generates less revenue would have to pay.
The more people a company employs, the greater the chance that one of them will make a mistake. That means that the more employees you have, the higher your premium will be.
Years Of Experience
Experienced professionals and mature companies can expect to pay smaller premiums. For insurers, the number of years in business reflects positively on the quality of the business’s services.
During the quoting process, insurers will ask for you to disclose how many E&O-related lawsuits have been filed against your business in the past. The more claims you’ve faced, the higher your premium will be.
A deductible is the amount of money your company will have to pay on its own before the insurance policy kicks in. There are two types of deductibles available in most E&O policies:
- The First-Dollar-Defense (FD) Deductible: Applies only to actual paid claims. This means that the company doesn’t have to pay anything until the claim is settled or a judgment is reached.
- The Defense-And-Loss (DL) Deductible: Applies the deductible to the defense costs in addition to the paid claims.
If an E&O claim is filed against you, the insurer will typically hire an attorney to defend you. In most cases, the defense costs will start to pile up as soon as the claim is brought forward. The attorney will need to set up a file, start researching and preparing the case, and answer the lawsuit.
With a DL deductible, the company will have to pay a part of legal fees even if the lawsuit is totally groundless and ends up being thrown out.
Your E&O premium will be affected by the type and amount of deductible you select. The higher the deductible, the lower the premium. An FD deductible will be more expensive than a DL deductible, as well.
The Potential Cost of Not Having E&O Coverage
Any business that doesn’t invest in an E&O policy or doesn’t secure sufficient coverage is taking a very significant risk by not doing so.
No matter how good you are at doing what you do, anyone and everyone can make a mistake, and the financial implications of an E&O claim can be considerable. Even before a settlement is reached or damages are awarded, the defense costs can rack up quickly. Even if the claim is entirely frivolous, you’ll still need to hire an attorney to handle the lawsuit, which is an expense that is almost entirely out of your control.
And it’s not just about money. An E&O claim can cause chaos and uncertainty in a variety of ways. Consider the wellbeing of the employee that was responsible for the alleged mistake and the fear and anxiety they may be experiencing.
Productivity could plummet if employees are carrying the burden of trying to be error-free when performing their duties because they know that your company doesn’t have insurance to protect itself.
The stress and negative workplace morale caused by facing a claim unprotected can be overwhelming for both employees and management. With this perspective, it becomes very clear that the cost of purchasing an E&O policy is hardly steep compared to the potential costs incurred by not having one in place.
Working with the right insurer and putting together the right policy for your business affords you the peace of mind of knowing that whatever happens, your business will be able to weather the storm.
Beyond that, many E&O insurance providers will actually hire a law firm of their choice to handle your case, relieving you of this often arduous task. They will also work with you and your employees to analyze the allegations and provide the necessary documentation to provide the proper defense.
All these variables lead us to the recommendation that absolutely any business providing professional services should strongly consider obtaining the right errors and omissions coverage. While it may seem like a “non-essential” investment at first glance, securing the right coverage could prove to be the difference between prosperity and ruin if your business is hit with a costly professional liability lawsuit.
If you’re interested in purchasing errors & omissions coverage and want to make sure that your business is getting the right level of protection at the right price, don’t hesitate to reach out to one of our expert brokers to discuss your options at any time.
To learn more about the right coverage for your business, check out Embroker’s digital insurance platform.
If you’re curious about the difference between general liability versus professional liability insurance, continue reading to learn about the nuances of each, how they’re similar, and how they differ.