Understanding E & O Insurance
Understanding E & O Insurance
Most licensed occupations require e & o insurance, also known as errors and omissions liability insurance. Before obtaining a license, a firm must show evidence of e & o insurance to the licensing agency, whether city, county, state, or federal. This guarantees the public and the agency that the licensee, through their insurance company, can cover losses if sued for an error or an omission in professional judgment while working for a client. Basically, this type of insurance protects the public from firms that might go into business without the proper credentials or knowledge, since no insurance company will issue an e & o policy without appropriate documentation such as a degree or other educational documentation.
For example, if a structural engineering company puts its stamp of approval on a set of construction plans, it certifies that the engineers have been awarded an appropriate degree, know local codes, and relevant calculations have been made to ensure the safety and security of the structure. Whether it is a parking lot, retaining wall, or downtown office building, the licensed engineer always uses calculations based on local requirements for earth movement, wind velocity, and/or other known local conditions that affect stability. The licensing agency protects the public by requiring the firm's e & o insurance carrier to back up the firm's reputation, knowledge, and documentation so the structure is engineered to stand up to anticipated worst-case scenario conditions.
What that means to the general public is this: if the firm is sued after a catastrophe based on an "error" or "omission" in their calculations, the company's insurance company will make payment on their behalf to the victim who suffered as a result of the firm's mistake, whether an individual or group. Naturally, this insurance is very expensive because it backs up the firm being insured, so e & o carriers are careful whom they insure. Whether it is a structural engineering firm as in the above example, or a physician, insurance agent, architect, or another member of a professionally licensed occupation, e & o insurance protects the public in situations where a individual or firm's professional error or omission can cause damage.
Ultimately, there are also occasional "nuisance" lawsuits that raise the cost of e & o insurance to the licensee, and by extension, to the general public when the costs are passed on. Most of these cases do not go to court because everyone involved knows it will cost more than a simple "token payoff" with no admission of guilt. In the end, it is the general public who pays for the frivolous lawsuits because it raises the insurance company's cost, and raises the licensed firm's cost to purchase e & o insurance.
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