What Should My Errors and Omissions Insurance Policy Cover?
Errors and Omissions (E&O) Insurance claims are on the rise, and many insurance underwriters predict a “tsunami” of E&O claims in the near future. According to Insurance Journal, “Today’s combination of hard market conditions and COVID-19 is creating even more challenges as pandemic-related exclusions, limits, and supplemental applications are being added to nearly every line of business—including E&O insurance.” So when it comes to obtaining E&O insurance, what should your startup be mindful and weary of?
First let’s define our terms. E&O insurance is one of the ways in which startup leaders are able to mitigate risk and protect themselves against the liabilities that can come with running a startup. It is designed to protect startups from a variety of expenses and costly scenarios in which they themselves, or a service they provide, are found or claimed to be at fault for a customer's severe financial loss.
Below we answer the top questions that startup leaders have about E&O insurance and tell you what to keep your eye out for in terms of exclusions.
What is Errors and Omissions insurance meant to protect against? What types of incidents can trigger the policy?
Errors and Omissions insurance is sometimes referred to as professional liability insurance or E&O insurance. It is meant to protect you and your company against customer lawsuits, claims, or demands. For tech startups, these types of policies are most commonly activated when there’s some kind of product issue or failure. For example, where a problem with your product causes a financial loss for your clients or when a service you provide has a glitch that does the same.
When coverage is triggered, your E&O coverage assists with legal fees, court costs, and any settlements or judgements that are made. Even in the instance that your company isn’t actually at fault, building a defense and going to court is still a costly experience, and one that professional liability insurance can help you manage.
Does my early-stage company need Errors and Omissions insurance?
The answer here depends entirely on your organization. However, it’s highly recommended that startups begin investing in E&O insurance as soon as they launch their product and are actively interacting with customers. At this stage in a company's life, the likelihood of a lawsuit or a “claim” being filed against you increases drastically.
Specific professions and organizations require a certain amount of professional liability or E&O insurance before you can legally begin operations. In spaces like fintech, for instance, companies are often required to purchase E&O insurance early on. In these cases, neglecting to invest in a policy is a hindrance to the growth of your company.
When does it make sense to activate Errors and Omission insurance?
There are two answers to this question. The first answer addresses when it’s time for your company or organization to invest in and purchase E&O insurance, and the second answer pertains to when these policies are actually activated.
As soon as your company begins interacting with customers, or launches its product, this is a great time to purchase your E&O insurance. The chances of a claim being made increase once customers are using your product or service.
Policies are activated, however, in the instance that a customer claims that your service or product is at fault for a financial loss that they experienced. In this instance, the coverage limits kick in and assist with building the defense, as well as other legal fees.
Why is Errors and Omission insurance more expensive than other coverages?
Multiple variables factor into pricing policies. However, two of the main and most telling factors are the frequency and severity of potential claims. In other words, how often is your company at risk and how much loss could be incurred?
For example, a startup in the fintech space will have higher E&O coverage costs than a direct-to-consumer (DTC) brand due to the likelihood of a customer’s financial loss in the case of a technical malfunction. This, combined with the historical volume of professional liability claims, creates the price-point you see on E&O policies.
What are the most common coverage limits for companies like mine?
Consider what your worst-case scenario is and protect yourself against that. As a starting point, Vouch generally recommends a flat coverage of $1M in E&O insurance. This is a good baseline for most startups, but can be increased or decreased to meet the needs of a specific company.
For example, if there are certain risk factors your company is facing, you may want to increase this limit. On the other hand, if your team isn’t expecting to onboard a mass volume of clientele right away, starting with a slightly lower limit can make sense as well.
Analyze your customer contracts to see what level of exposure you’ve agreed to. If there are strong limitations of liability in place in your contracts, that can help to reduce your exposure. However, if your startup is doing business with enterprise customers and your startup shoulders the majority of liability in your contracts, that could increase exposure to loss.
At Vouch, upgrading or increasing your limits is made easy via your account online. This way you can easily scale your coverage alongside your business, and you’re never left unprotected.
What does Errors and Omissions insurance not cover?
Every insurance policy will come with a list of definitions, inclusions, and exclusions. This is to be as transparent as possible with the consumers who are purchasing these policies and to make sure that everyone understands the full scope of the coverage.
With E&O insurance, there are specific exclusions that should be noted. Client injuries, employee theft, client property damage, and cyberattacks are all common exclusions on E&O policies. At Vouch, we never want to leave you exposed to liability, and we offer supplemental insurance policies to cover cyberattacks and data breaches specifically.
Plus, it’s worth reiterating that while many E&O policies traditionally exclude technological services, Vouch prioritizes startups and makes sure to write in inclusions for tech-service companies in all fields.
Is there a deductible for E&O insurance, and why is that?
As with most insurance policies, there is a deductible for E&O or professional liability insurance. In fact, there are sometimes even two. The deductibles for E&O insurance function in a similar way to deductibles on other policies. There’s a set limit that your organization will be responsible to pay before the policy kicks in. This is mostly intended to protect your organization from activating the policy for petty claims and saves your policy for more detrimental financial loss.
Additionally, the deductible amount will play a part in determining just how expensive the rest of the policy is. The higher your deductible, the higher limits will be available.
Want to know more about E&O insurance and the coverage options Vouch provides?
As the underwriter, Vouch has re-engineered insurance end-to-end to remove hidden fees and paperwork from start to finish. To find out more about Vouch’s E&O insurance policies, click here.