Errors and Omissions (E&O) Insurance: What It Is and How It Protects Your Business

Key takeaways
* Errors and omissions (E&O), or professional liability insurance, protects businesses and professionals against client claims alleging negligence, errors, or inadequate performance of services.
* E&O typically covers legal defense costs, settlements, and judgments for covered claims, but excludes bodily injury, property damage, employment claims, criminal acts, intellectual property infringement, and many data-breach losses.
* Any business that provides professional advice or services for a fee—consultants, accountants, real estate agents, tech firms, designers, and many licensed professionals—should consider E&O. Small-business premiums often average around $735/year, though costs vary widely by profession and risk.

What is E&O insurance?
E&O insurance is a liability policy that responds when a client alleges your professional service or advice caused financial harm. It reimburses legal fees, court costs, settlements, and judgments for covered claims of negligence, errors, omissions, or failure to deliver promised results.

How E&O works (simple example)
A client hires your IT consulting firm to upgrade manufacturing software. Months later they sue for $50,000, alleging your guidance caused machinery failures and lost orders. An E&O policy may pay defense costs and any covered settlement or judgment, up to the policy limits, even if the claim is ultimately found baseless.

Who needs E&O insurance?
Consider E&O if your business:
* Provides professional advice or services for a fee.
* Works under written contracts that require professional-liability coverage.
* Is in a profession commonly subject to client lawsuits (e.g., accountants, architects, engineers, consultants, financial advisors, real estate agents, healthcare providers, lawyers, IT consultants, wedding planners).

Some professions are required by law or licensing boards to maintain professional liability coverage.

What E&O typically does not cover
Common exclusions include claims arising from:
* Bodily injury or property damage (covered by general liability policies)
* Employment-related claims (discrimination, wrongful termination)
* Fraud or intentional criminal acts
* Worker injuries (covered by workers’ compensation)
* Patent or other intellectual property infringement
* Data breaches and theft of sensitive data (covered by cyber liability policies)

Always read policy wording for specific exclusions.

Choosing the right E&O policy
Consider these factors when selecting coverage:

Covered risks
* Choose a policy tailored to your profession or one that explicitly covers your services.
* Check whether the insurer offers related coverages you might need (e.g., employment practices liability).

Limits and structure
* Per-occurrence limit: maximum payable per claim.
* Aggregate limit: maximum payable during the policy period.
* Make sure quoted policies are comparable (per-occurrence and aggregate) when evaluating cost.

Deductible and cost
* Higher deductibles typically lower premiums but increase out-of-pocket exposure.
* Premiums vary by industry, business size, claims history, and limit selection.

Claims-made vs occurrence
* Most E&O policies are claims-made: they cover claims made while the policy is active. If you cancel, you’ll need tail coverage (extended reporting period) to cover later claims.
* Occurrence policies cover incidents that happen during the policy period regardless of when the claim is made; they’re generally more expensive.

Legal costs
* Prefer policies that pay attorneys’ fees and defense costs outside the limit so legal costs don’t erode the amount available for settlements or judgments.

How to buy E&O insurance
* Start with your current business-insurance carrier or broker—many offer E&O or can refer a specialist.
* Request quotes from multiple insurers and confirm coverages, limits, exclusions, and whether defense costs reduce the limit.
* If you operate internationally, ensure the policy covers work outside the U.S. or excludes no relevant jurisdictions.
* Keep clear records of contracts, scopes of work, client communications, and quality-control processes—insurers consider risk-management practices when underwriting and pricing coverage.

Why E&O matters
General liability insurance typically excludes claims arising from professional advice or services. An E&O claim—legal defense and any settlement—can be financially devastating to small businesses. Professional liability insurance protects the business’s assets and continuity when a client alleges a costly professional mistake.

Common example
Medical malpractice is a type of E&O that protects healthcare professionals from claims of negligence or medical errors. Many medical licenses require malpractice coverage.

E&O vs. General Liability
* E&O (professional liability): covers financial losses to clients caused by mistakes, negligence, or failure to perform professional services.
* General liability: covers bodily injury and property damage to third parties, advertising injury, and some premises-related exposures.

Bottom line
Errors and omissions insurance is essential for businesses that provide professional services or advice. It covers defense costs and financial liabilities from client claims of negligence, errors, or failure to perform—risks not covered by general liability. Evaluate policy scope, limits, deductibles, and claims-made versus occurrence terms to ensure adequate protection for your industry and operations.