If your business provides professional advice of any sort you will need errors and omissions insurance, also known as professional indemnity insurance.
However well-run your business is, you and your staff are only human and mistakes can and do happen, and that’s where errors and omissions insurance can help.
In this guide, we’ll provide all the answers to the most commonly asked questions about errors and omissions insurance.
- What is errors and omissions insurance?
- What does errors and omissions insurance cover?
- What is typically excluded under errors and omissions insurance?
- Who needs errors and omissions insurance?
- How much errors and omissions cover does a business need?
- How long will an errors and omissions policy last for?
- Common error and omissions claim examples
- What do I need to provide to get a quote for error and omissions insurance?
Errors and omissions (E&O) insurance protects you or your business against claims made by clients for negligent or mistaken advice, services, or designs.
Clients and others can bring claims for compensation against you even if you provided the advice or service for free.
If you are a sole trader or partnership, and therefore have unlimited liability, E&O insurance protects your personal, as well as your business, assets.
Errors and omissions insurance covers the legal costs of defending a claim alleging you gave negligent or mistaken advice or services, as well as any compensation you may need to pay to put the error right should you lose the case.
For example, if an architect drew up flawed plans for a building extension, E&O insurance could pay for the cost of new plans, alterations to the building, and any other consequential losses suffered by your client.
Compensation can include any fines your customer has incurred as a result of your incorrect advice.
Cover can be provided for a wide range of scenarios which could cause loss or damage to your client, including:
- Failure to meet a deadline
- Breach of confidentiality (perhaps with an accompanying cyber insurance)
- Infringement of copyright, trademarks, and intellectual property
- Loss of records or documents
Cover for errors relating to environmental pollution and asbestos-related risks can also be provided.
As well as what is covered, it’s important to know what is not covered by errors and omissions insurance.
Some of the issues that are excluded from E&O insurance policies include:
- Intentional wrongdoing, such as deliberately misleading a client, or withholding files and documents.
- Illegal acts, criminal activity, and costs associated with criminal prosecutions.
- Personal injury to third parties on your premises, which may be covered by a public liability insurance
- Employees injured in the workplace, which may be covered by employers’ liability insurance.
- Discrimination cases or other employee disputes, which can be covered under an employment practices liability policy.
- False declarations, such as statements in marketing and advertising materials, or on your website.
- Information leaks from cybercrime are not always covered under E&O insurance, but third party liability can be covered under a cyber insurance policy.
E&O insurance is designed to cover professional advice, services, and designs and, while it does cover advice given about an insurance or financial product that turns out to be incorrect, it would not apply to a shop giving advice about which TV you should buy.
It’s also important to look at the type of E&O policy you have, ‘claims made’ (the most common), or ‘occurrence’, which settle claims on different criteria.
A ‘claims made’ policy must be in effect at the time a complaint from a client is made, whereas an ‘occurrence’ based policy covers you if the policy was in force at the time of the event even if it had lapsed by the time the complaint is made. However, the policy limit at the time might not be adequate when a claim is eventually made, and this is why this basis of cover is not very common.
In both cases, you must inform your insurer as soon as you become aware of the circumstances that may give rise to a claim, even if you don’t need to make a claim at the time.
A professional indemnity insurance policy is just another name used for an errors and omissions policy.
What is the retroactive date in errors and omissions insurance?
The retroactive date is the date from which claims for work performed will be covered, which is normally the date you started buying insurance.
It’s important, therefore, to take out E&O insurance as soon as you start trading, although some policies allow you to backdate your cover date for an extra fee, and others may state ‘retroactive date – none’, which would cover all past work.
Your policy may be invalid if you backdate cover in the knowledge that a claim from that period is likely to be made.
Errors and omissions insurance is generally required by professional businesses that provide advice, services, or designs, and those who deal with data and intellectual property.
In short, any business where a mistake in the provision of advice or services could have a costly impact on a client.
We’ve put together a list of the type of businesses that would require E&O insurance, although it is not exhaustive.
- Solicitors and anyone providing legal advice
- Accountants and bookkeepers
- Insurance agents and brokers
- Financial service advisers including mortgage brokers, pension advisers, and investment managers
- Chartered surveyors
- IT service providers
- Recruitment consultants
- Marketing and advertising professionals, including web designers
- Business consultants
- Public relations professionals
- Software programmers
- Estate agents
- Healthcare providers
Is errors and omissions insurance a legal requirement?
Errors and omissions insurance is not a legal requirement, but certain professions are obliged – either by statute or their professional body – to have cover.
For example, insurance brokers and financial advisers must have E&O insurance to comply with Financial Conduct Authority (FCA) regulations, while solicitors are obliged by the Solicitors Regulation Authority (SRA) to have cover in place.
Any business covered by a Royal Charter, such as chartered accountants and chartered surveyors, must also have E&O insurance.
Your business may also need E&O insurance if required by clients of a contract.
Is errors and omissions insurance tax deductible?
Yes, you can deduct the cost of premiums from your taxable profits on your tax return.
There is no one-size-fits-all level of cover, because every business has a different level of exposure to potential claims.
However, there are two scenarios where your business may be required to have a minimum indemnity limit:
- where it is required by a regulatory body, typically for accountants, solicitors, financial advisers, architects etc;
- where it is required by clients to secure a contract.
But just because there may be a minimum level it doesn’t mean it will be sufficient to meet all potential claims.
For example, you may be required to have a particular level of cover, but your business may have a higher potential exposure if you work with large clients or contract-specific.
What is the appropriate level of errors and omissions cover?
To find the appropriate level of E&O cover for your business, you need to look at the types of projects you undertake, the industry in which you work, and the maximum possible impact of making an error.
You need to consider:
- the cost of putting the error right;
- any financial loss for your client;
- the cost of any legal fees on both sides;
- your loss of earnings from reputational damage;
- your clients’ financial ability to take legal action.
An experienced insurance broker will be able to help you analyse the level of risk you may face, and therefore the indemnity limit that you need.
Alan Boswell Group can arrange indemnity limits from £50,000, and have provided policies for risks in excess of £25 million.
Errors and omissions insurance policies typically run for 12 months, but people can submit claims against you or your business six years after the ‘mistake’ took place.
That’s why you need to consider buying ‘run-off’ insurance that will provide cover once you have retired, ceased trading, or sold your business.
Run-off insurance protects you against claims that occurred while your business was operating, and the subsequent length of time you will need insurance for can vary depending on the types of contract you signed while in business.
Cover is normally required for at least six years, the time period specified under the Limitation Act for clients to bring claims for negligent advice.
However, claims in tort can be extended by a further three years from the date you became aware of the action against you, while contracts signed ‘in deed’ or under seal can have a 12-year time limit.
In all cases there is an absolute cut off of 15 years to bring a claim, so you may need to continue run-off cover for years after you cease trading. If you have sold your business, it is possible the purchasing business might provide this ongoing cover for you.
Some regulatory bodies may make it a condition on their members to maintain run-off cover for a certain amount of time after they cease trading.
There are many scenarios that could give rise to an errors and omissions insurance claim, but here are a few examples to provide context to the cover described above.
- IT consultancy recommends unsuitable software: an IT consultancy incorrectly advises a client to install new software at great expense, which is then found to be unfit for purpose. The client sues the IT firm for the software cost, time taken to install it, plus the cost of seeking new advice and software.
- Conveyancing solicitor error: a conveyancing solicitor acting for a house buyer failed to spot that an extension did not have planning permission or building regulations approval. Having completed the purchase, the buyer discovered the error and sued for the cost of obtaining retrospective permission and approval.
- Accountancy error: a failure to lodge tax returns led to the client losing tax repayment and interest, which they sought to recoup from the accountant.
- Graphic designer breach of copyright: a graphic designer used copyrighted images without a licence on behalf of a client and was held liable to pay the costs of the licence holder.
To obtain a quote for errors and omissions insurance, you will need to provide the following information:
- your annual turnover, to gauge the size of your business;
- the industry in which you work and the type of service you provide;
- the geographical regions in which you provide your service;
- your level of experience and qualifications;
- the size of projects you undertake;
- your claims history;
Get an errors and omissions quote from Alan Boswell Group.