Paying for the Sins of Business Errors and Omissions

I recently sent the following email out to my customer’s who subscribe to our monthly tips regarding Business Errors and Omissions. As often happens the email caused some discussion. I thought it would be good to share with everyone the question Dan Daley, of Daley Construction, Bend Or. asked me after getting the email. If you have any questions or comments please let me know.

Text of the Original Email Sent Out On Errors & Omissions

Flicking through the Sunday newspaper recently I noticed a small ad from one of the big-name retailers pointing out that the bargain price they listed in one of the million-or-so inserts weighing my paper down wasn’t quite as good as they made out.

They goofed and they were trying to save themselves a collective red face if a whole stack of customers turned up demanding they make good on that advertised price.

We all mistakes, don’t we? But some can be quite costly — I read a few months back that a big online retailer lost $1.6 million through a pricing error. Some mistakes have even been known to put companies out of business.

In fact you might have noticed now how many organizations put a sort of disclaimer in ads and other documents absolving themselves from blame for “Errors and Omissions”, or E&O’s. In fact, they’re potentially so costly that Business Errors and Omissions insurance is becoming increasingly common especially in professional practices.

The term is also sometimes used to refer to professional liability and malpractice insurance; the aim is to protect policyholders against legal actions seeking compensation for negligence — that’s the key word.

And the fact is that just about any company could theoretically be open to this type of lawsuit. Certainly, pretty much any type of consultancy, media or marketing business, and service provider (for example recruitment agencies or website designing and hosting companies) are potential targets.

Or how about a wedding planner who screws up and books the wrong venue or the wrong date, a freight agent who sends a consignment to the wrong place, a home inspector who overlooks an important defect, or a gardener who plows through your rare orchids with a lawnmower?

Basically, if you provide a service to a client for a fee, you have an E&O risk. Think about it.

And, if so, the time to take out your policy is as soon as possible, not least because it probably won’t cover errors that pre-date the policy, even if the lawsuit arises after the policy is activated. Also, some business contracts with clients may actually stipulate that E&O insurance is in place, while in other cases, knowing that you do have coverage in place is a good customer service point.

Looked at from the other end of the telescope, even if your business is unlikely to require this type of coverage, it’s worth checking that the professionals and service providers with whom you deal do. Otherwise, in the unfortunate event that they let you down, you may find them unable to compensate you for any loss you suffer.

They may prefer just to shut up shop and leave you whistling for your money. So, don’t be afraid to ask. It’s in your interest.

If you do need this kind of coverage, or know someone who might, it’s important to stress that a business owner’s policy (BOP) or general business liability policy usually do not include coverage for professional liability.

The policies themselves differ widely in their structure and terms according to the types of risks being covered. As I said earlier, some impose time restrictions, while others may put on cap on the damages they will pay or exclude certain defense costs.

I think we’re going to be hearing a lot more about professional liability claims in the coming years.

Why? Recovery from the recent Great Recession has seen a significant growth in the number of service oriented businesses. Thrown out of work, many individuals have launched their own Consultancy, while the surging growth of the Internet has sparked a big increase of web-related service companies.

Every one of those, even the work-from-home outfits, is a professional liability risk.

Added to that, we live in a litigious society where many stand ready to point the finger of blame for errors and to claim, as a result, they’ve suffered astronomical losses they want someone else to pay for.

It’s not about someone getting the price of a bargain wrong in the local paper (which, incidentally, is not strictly an E&O insurance issue unless the printer made the mistake); it could be about protecting the survival of your business.

Is your business insured properly?

Dan’s Question:

Several years back I took out a site specific policy $18000 premium paid upfront ( condominiums ) & on the advice of a lawyer within my family asked for a quote on “E&O’s ” policy .I was informed that it is for professionals only; when I somewhat hurt asked what I was , the reply was that architects & engineers , lawyers etc are considered professionals & insurable as such: framers (30 years exp.) are not .I’m not sure if things have changed within the insurance industry , or one of you is mistaken .

Sincerely ,

Dan

Dear Dan

Rex’s Answer

Thanks for the note about E&O issues. It is nice to see that the information that we sent out gets read.

I understand that there might be some confusion about this topic. I think the best way to answer your questions is to try to draw a line between where coverage on your General Liability coverage ends and where Business Errors and Omissions coverage might begin. With general liability your policy excludes professional liability. It does however cover you for bodily injury and property damage from your premises and operations and your product and completed operations. Simply read, while you’re working and after your done.

Errors and Omission covers financial injury from errors that may not cause direct damage. Say an engineer calls for a 12” beam to support the load and in reality and 18” beam is necessary. Or omission like an architect does not include enough bath room stalls to meet code in a public building. Or an engineer designs a sprinkler system with 1 head per 100 sq ft but code is one every 66 Sq ft. A HVAC contractor designs and install a heating and cooling system that is not big enough and will not heat or cool the building properly. If no one catches the errors until after the fact there may be extensive and expensive repairs. In my examples no one got hurt and the buildings have not been damaged. The owner is out the cost of the retro fit, and will bring a claim against the architect or engineer or designer, not the contractor who did the work following a plan drawn by someone else.

Under your general Liability if you do not build something to plan which causes a construction defect then the general liability will respond.

So unless you are drawing plans or designs you do not have an Business Errors and Omissions exposure. With no exposure the insurance companies are hesitant to offer coverage. Not that the coverage is not available to generals that do their own designs or on major projects like warp-ups. The underwriting is strict and the minimum premium is $20,000.

In your case a suggested risk management tactic would be to never deviate from the construction plan without a written and signed order from the owner, engineer, or architect.

If you would like to discuss this in more depth please let me know.

Thank you

Rex

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Disclaimer: This content is provided for general information purposes and is not intended to be used in place of consultation with our agents.