Finance term

Errors & Omissions (E&O) Insurance

Also known as: E&O insurance, professional liability insurance, malpractice insurance

Definition

Errors and omissions (E&O) insurance covers claims arising from mistakes, errors, failures, or omissions in professional services rendered. Standard for accounting, legal, real estate, consulting, technology, and financial services firms. Protects against client lawsuits alleging professional negligence.

Detailed explanation

E&O insurance (also called professional liability insurance, or malpractice insurance in healthcare and legal contexts) covers the gap that general liability does not: GL covers bodily injury and property damage; E&O covers economic harm from professional errors. If a client sues your firm claiming a mistake in your professional advice or services cost them money, E&O covers legal defense costs and potential settlements or judgments.

E&O policies are written on a 'claims-made' basis — the policy in force when the claim is filed (not when the alleged error occurred) responds to the claim. This means businesses need continuous coverage and 'tail coverage' (an extended reporting endorsement) if they cancel or switch carriers. Gaps in claims-made coverage can leave a firm uninsured for historical services.

Key industries where E&O is standard or required: (1) Accounting — CPAs face client lawsuits for tax errors, audit failures. (2) Legal — attorney malpractice insurance. (3) Real estate — agents and brokers carry E&O for transaction errors. (4) Technology — tech E&O covers software failures, data breaches, system failures. (5) Financial services — registered investment advisors are required by many states to carry E&O. (6) Insurance brokers — required by state insurance regulators in most states.

For business lending: SBA and commercial lenders in professional service industries typically verify E&O coverage as part of business risk assessment, particularly when the business's value and cash flow depend on professional service delivery.

◈ Worked example

CPA files client's tax return incorrectly, resulting in a $50,000 tax penalty. Client sues. E&O covers CPA's legal defense + settlement up to policy limits.
Technology consultant: custom software implementation fails, client loses $200K in revenue during downtime. E&O covers defense + settlement costs.
Real estate agent: fails to disclose known property defect. Buyer sues after closing. E&O covers defense costs and judgment up to limits.

Common questions

The most-asked questions about Errors & Omissions (E&O) Insurance — answered straightforwardly.

What is the difference between E&O and general liability insurance? +

General liability covers physical harm — bodily injury and property damage. E&O covers economic harm from professional errors and omissions. A consulting firm that gives bad advice causing a client financial loss would not be covered by GL (no physical harm) but would be covered by E&O. Most professional service businesses need both GL and E&O.

What is claims-made coverage? +

Claims-made E&O policies only cover claims filed while the policy is in force, regardless of when the alleged error occurred. This contrasts with 'occurrence' policies (like most GL) that cover events occurring during the policy period regardless of when the claim is filed. If you cancel a claims-made E&O policy without purchasing 'tail coverage,' you are uninsured for any future claims arising from past work.

Is E&O insurance required by law? +

Not uniformly by law — but often required by licensing boards, client contracts, or professional associations. Registered investment advisers (RIAs) are required to carry E&O by most state regulators. Real estate brokerages are required to carry E&O in many states. Many large enterprise clients require E&O as a contract condition before engaging professional service vendors.

Errors & Omissions (E&O) Insurance

Detailed explanation

Common questions

Further reading

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