Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 2, 2021

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Being in business is, ahem, risky business. There are all types of potential liabilities your company must be insured against.

Every business requires a commercial general liability policy of some type if they offer professional services. It’s for the defense of the business and any client who works with them.

Small businesses may get by with the business owners policy (BOP), while larger outfits usually opt for the full CGL policy, which can offer any number of available coverage types to the insured.

However, when it comes to business professionals, there is a different policy that may be necessary.

Insurance agents, attorneys, real estate agents, doctors, and tax preparers, for example, require an errors and omissions insurance policy on top of the general liability policy.

[How much is commercial general liability insurance?]

All of the professionals above (and many more) are trusted to deal with large sums of money and to protect their clients against financial losses and medical problems (malpractice). It’s a daunting service to offer, one that comes with many risks.

So what happens if they make a mistake? After all, they are all human.

What is E&O insurance?

With such great service comes obvious limitations. No one is perfect; that’s where errors and omissions, also referred to as E&O insurance, comes into play.

Simply put, it is insurance designed to protect a professional against monetary damages arising from their negligence. Specifically, when they make a mistake that would lead a client to experience a financial loss. It may seem strange to protect a business or person against mistakes they’ve made that could be problematic for their client, but it’s not all malicious.

Let’s look at an example (one of a million possible) of a potential E&O insurance claim for which liability would fall on an agent.

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What would be an example of a claim?

Imagine a client calls his insurance agent to add a newly purchased car to his auto insurance policy.

The agent takes down all of the pertinent information about the vehicle and notifies the client that he will add the vehicle to the existing policy.

The agent hangs up the phone then immediately receives five more phone calls, one of which is a large claim the agent needs to work on immediately.

A few hours pass and the agent forgets to add the vehicle in question to the policy.

Five weeks pass and the agent gets a call from the insured, notifying him that he had an accident and totaled his new car.

There’s just one problem; the vehicle isn’t listed on the policy and there is no coverage in place (new vehicle grace period).

In this case, the insurance agent would be liable for the damages to the vehicle because he failed to secure coverage for that vehicle. This is where the errors and omissions policy would be triggered. The client did everything right, calling in to protect themselves against any unnecessary expenses in case of an accident. It was a mistake, but a costly one at that.

Subject to an insurance deductible; the E&O policy would reimburse the insured client (or more likely the loss payee if the vehicle is leased/loaned) for the financial damages that resulted from there being no coverage in place.

Even the most meticulous human is still, well, human. The cost of errors can be terrifying at times, which can lead to further stress on the job. E&O insurance offers peace of mind, not in order to have a person slack off on the job, but rather just in case one of a wide range of accidents occurs. The free advice here is that mistakes happen, and while they can have consequences, there can also be protection against lasting damages.

(photo: Marco Verch)