Errors and Omissions Q & A – Answers from a Liability Insurance Professional

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Errors and Omissions Q & A Answers from a Liability Insurance Professional

If you're an independent systems integrator or custom programmer, you've probably heard about errors and omissions (E&O) coverage. It's one of the most important types of insurance for any small business, and it's often required by client contracts. But many IT professionals may not understand exactly what it covers or how it's different from other kinds of business insurance.

Systems integrators and programmers are always asking for more information about E&O insurance. Here are the answers to some of the more common questions:

Is there a difference between professional liability and errors and omissions insurance?

"Professional liability insurance," "errors and omissions insurance" and even "E&O insurance" are essentially the same thing. These are simply different terms used to describe insurance that protects your programming or systems integration business if a client should allege that you or one of your employees made an error while providing IT services, causing the client a financial loss.

What's the difference between E&O insurance and general liability insurance?

E&O insurance, which you'll also hear called "professional liability insurance," covers you for mistakes you may make while performing your professional services. General liability insurance, on the other hand, covers only claims of bodily injury or property damage.

Often, clients will require that you carry general liability insurance, just in case an accident does happen while you're doing your job. For example, general liability would cover you if the client should come to your office on a rainy day and slip on a wet floor, or if you hurt someone at the client's location.

A Business Owner's Policy, also called a BOP, includes both general liability insurance and property insurance, and can be a cost-effective choice for many independent systems integrators and custom programmers. A BOP's property coverage protects your programming or systems integration business' property, whether it's at your own office or a client site, against physical loss or damage. For example, property that is stolen or damaged in a fire would be covered. Although in most cases, data are not considered property, some IT-specific property insurance policies do cover the costs of restoring lost data as well.

Interestingly, damage you might cause to your client's property while installing, configuring or repairing hardware is actually not covered under the liability portion of a general liability policy, but is covered under your own property coverage. When you are working on a client's equipment, it is considered to be in your "care, custody or control," and is covered just as if it were your own property.

Your client may specify in your contract that you carry both E&O and general liability coverage. In such cases, you'll need at least two separate policies: professional liability and general liability. As long you're buying general liability coverage, it makes sense to get a quote for a BOP as well, since you'll get the added benefit of property insurance without paying much more in premiums.

Doesn't general liability insurance include errors and omissions coverage?

No, the two are separate. Only a professional liability insurance policy (also known as E&O insurance) will protect your company if a client should sue you for an error you make while doing your work. General liability covers bodily injury and property damage claims, but generally, there are exclusions for claims involving professional negligence or failure to perform your professional duties.

Exactly what kind of risk does E&O insurance cover?

For systems integrators and software programmers, E&O coverage is triggered when a client claims that you're responsible for loss due to an error on the part of you or one of your employees. Examples might include losses caused by the failure of a backup strategy or firewall, or business interruption caused by overloading a circuit and knocking the client's servers offline for a period of time.

For systems integrators, risk may also arise if you fail to correctly install one of the components for a working system, or if your project doesn't launch on time due to your own delays, and that error or timeline delay affects the client's ability to serve its customers or generate revenue.

Should you face a claim, keep in mind that errors and omissions liability insurance will pay only for your legal defense and any legitimate client demands for monetary compensation not for your own costs to correct the problem.

There are some business disputes for which you simply can't insure yourself, and for these, you may need legal contracts. These may include, for example, claims that you've stolen one of the client's customers or stuck the client with a bill you didn't pay. Be sure to ask your agent if you're not clear on what your E&O policy covers.

I don't expect to make any mistakes that will get me sued. Do I really need E&O coverage?

Many systems integrators or computer programmers will never face a lawsuit. But at some point, most business owners choose peace of mind and decide that carrying that much risk just isn't worth the small price of an annual premium. The fact is, if your signature is on the contract, you're the one who will be held accountable if something goes wrong even if that something is beyond your control.

It only takes one sour client relationship to get sued. Whether you actually are at fault for a problem or not, your client can easily claim that you are. And regardless of whether the client's suit has merit, you'll be stuck with the cost of a legal defense. If you're like most small-business owners, you don't have deep pockets or a built-in budget for taking on corporate lawyers.

How much does E&O insurance cost?

Several variables affect the cost of E&O insurance, including your company's location and revenues, along with the limits of liability and deductible you elect. For most one- or two-person outfits, $1 million in E&O insurance costs about $1,000 annually. That's less than 1 percent of gross revenue for many independent systems integrators or computer programmers a small investment for a lot of peace of mind.

If you're undecided about whether to protect your technology business with E&O insurance, talk to an insurance broker to learn about all the options before you make up your mind. It costs nothing to contact a technology insurance agent for a specialized quote.

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