Errors & Omissions Insurance - WTF?? (What's That For?)
By definition, Errors and Omissions (E&O) insurance covers professionals for actual or alleged errors, omissions or mistakes – caused by them or their products & services – which results in another party’s financial harm. Technology and digital media companies secure E&O insurance to safeguard against claims that the services they provide to others did not function properly. Once triggered by a suit or other demand for damages, an E&O policy will pay to defend the policy holder (pay legal defense fees) and any settlements or judgements that are made against them. This is the case regardless of whether the claim has merit or not. Put simply, an E&O policy responds to claims for a “failure to perform“.
You’ve been served
Commonly, claims come from clients who purchased a service/system and then allege that the system didn’t work, resulting in their financial loss. Let’s use the example of a client that purchases a mission critical software system to manage all of their business’s financial functions…..payroll, payables, receivable, taxes, etc…..the software promises to streamline all of these items where the client was previously using multiple platforms and vendors. Just a week after the client “flipped the switch” and started using the new system there was a crash. All of their data is lost and it takes them two full weeks to correct the problem. During this time they lose thousands of dollars recreating data, paying overtime, contacting clients, incurring penalties for non-payment of bills – and the list goes on. They sue the IT provider for all of the financial damages including their legal expenses, lost opportunity costs & loss of future revenue – and they want their money back for the faulty system which they ended up scrapping.
Insurance to the rescue
In this case if the IT provider were to submit the claim to their General Liability (GL) provider, the claim would be denied. General Liability covers claims for bodily injury & property damage – neither of which occurred in this situation. They would also submit the claim to their E&O insurer. While there is no industry standard, off-the-shelf E&O policy (every insurer has their own contract with it’s own terms, conditions, coverages, exclusions, etc) a typical E&O policy will pay the defense expenses incurred by the IT provider, along with the consequential damages claimed by the clients…..but, most likely, not the return of fees paid for the faulty system. More on this in a future post….
In the end, E&O is a risk transfer tool that companies can use to hedge against claims for mistakes made by their people or the products/services they provide.