subject: Defining Why A Company Needs Error Omission Insurance [print this page] Defining Why A Company Needs Error Omission Insurance
When a company or professional services firm deals in a large amount of documentation where mistakes and errors occur, it may be important to obtain error omission insurance. Believe it or not, a company may accidentally omit a very important word or phrase which can expose them to a possible lawsuit. Companies that deal with countless documents throughout the course of the day, continuously changing hands are at the highest risk. One simple omission from a highly sensitive document can lead to major financial headaches. In addition, omitting legally binding information for contractual documents is easier than one thinks.
An example of an industry that is highly exposed to errors and omissions would be the mortgage industry. There are millions upon millions of legally binding documents changing hands at a rapid pace. One individual loan package may contain up to 600 pages of legal documents. For example, if a borrower has refinanced a mortgage loan, and the loan has been approved and the necessary documents have been signed at the closing table, the loan is now official. However, one document on any refinance is known as the Right of Rescission. This means the borrower has three business days to rescind the loan completely after the closing date. If the document contains information that does not completely adhere to the rescission laws, and is signed at closing, the entire loan will be null and void and the mortgage company must take full responsibility for the loan, including the loss of the loan amount. They are also exposed to a potential lawsuit for allowing a borrower to sign misleading documents. Here is where having the right error omission insurance would be at its greatest benefit. Although this is usually an extreme example, it happens more often than not.
Comparing the amount of the premium for error omission insurance versus the extraordinary costs a company may spend on a lawsuit defense is well worth it. Having protection against claims that ultimately are fraudulent or wrong before spending countless amounts of money would be worth the extra premium costs. Essentially the insurance is a hedge against any current and future litigation. Imagine the cost of one simple typo costing the firm millions of dollars. One should keep that in mind when weighing the cost of a premium.
Any professional service may be eligible for error omission insurance liability coverage. Costs will vary from state to state and by industry as well. Obviously, the more an industry is exposed to the risk the more they can expect to pay. However, having an effective policy in place may wind up costing much less than an expensive lawsuit defense. E&O insurance may be the perfect protection in what could be a very risky business.
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