The purpose of Errors and Omissions Insurance is to provide coverage for lawsuits related to the mistakes or incorrectly done work of professionals or businesses.
An Errors and Omissions policy provides several important types of coverage, including judgments, settlements, and defense costs. This last provision – defense costs – may well be the most important component of the policy. Even if a lawsuit is proved groundless and the insured does not have to pay any money in damages, the cost of lawyers to defend the suit can be quite substantial. Errors and Omissions Insurance covers these costs when a lawsuit is triggered by a real or perceived mistake on the part of the insured.
In general, Errors and Omissions Insurance comes into play when a lawsuit occurs that is not caused by bodily injury or property damage which is covered by General Liability Insurance. This might include financial loss due to the failure of the insured to complete work by a promised date or makes an error such as a bookkeeping error by an accountant that leads to fines or lost funds.
In most cases punitive damages are excluded by law.
There is no standard policy for Errors and Omissions Insurance, which means that each insurer will differ. Often these differences are driven by the needs of the insured, i.e., a doctor possesses a different exposure to risk than a real estate agent.
In addition, depending on the carrier and type of policy, an insured may choose to add coverage for exposures such as trademark infringement.
Errors and Omissions Insurance is a claims-made insurance product. This means the policy that pays is the one that is in effect when the claim is made, not when the actual loss occurred. Often with these kinds of claims it can take several years for the actual problems to become apparent.
Most Errors and Omissions policies possess a retroactive date, which is the date in the past for which any occurrence will be paid on a claims-made basis. In general, the retroactive date for any policy occurs when the insured began purchasing claims-made Errors and Omissions Insurance, even if those past policies were through a different carrier.
The insured must read the policy carefully with the help of his or her agent. In some policies, defense costs are included within the limit of liability, so one very expensive lawsuit could mean the entire policy is paid out for the policy period.
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