6 Common Errors And Omissions Claims Examples
Professional service providers often have more legal exposure to risk than they realize. A screw up or failure, no matter how unintentional, can have major consequences for even the most respected firms and expert consultants.
Errors and omissions (E&O) insurance can help protect you from this risk. The policy provides coverage when your professional services involved negligent acts, mistakes, or oversights that harmed a client, but did not cause bodily injury or property damage. In other words, if a client sues because they say your business activities lost them a lot of money, E&O insurance will protect you. Commercial general liability policies do not cover this type of incident, so you need E&O insurance to fill the gap and ensure your business isn’t crippled by having to make a large payout from a claim.
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There are a wide variety of situations where E&O insurance might come into play—anything from inaccurate advice to poor planning might cause financial losses for a client. To help you understand how this could impact your business, here are six errors and omissions (E&O) claims examples.
Example 1: Incomplete or Improper Design Services
Company: Ocean Build and Design
- Revenue: $2 million
- Employees: 20
- State: California
- Industry: Architectural design
- Clients: Commercial and residential property developers
Situation: Ocean Build and Design missed key details in local zoning regulations when designing a mixed-use building for a property developer in Los Angeles. The city hit the brakes on the project and forced the developer to redesign and resubmit plans for approval. This significantly delayed the project and resulted in increased construction costs, missed leasing opportunities, and financial losses for the developer.
Claim: The developer sued Ocean Build and Design for failing to provide complete and accurate design services. The claim sought financial compensation for the additional expenses and revenue loss caused by the delays in the project.
E&O Payout: $300,000 for developer's losses and legal fees
Ocean Build and Design’s E&O insurance policy helped cover both the developer’s financial losses and the legal fees incurred in defending the firm against the claim. The covered payout allowed the design firm to continue operating without a significant financial burden, while maintaining its reputation in the industry.
Example 2: Incorrect Tax Advice
Company: Big Apple Tax Associates
- Revenue: $1.5 million
- Employees: 15
- State: New York
- Industry: Tax consulting
- Clients: Small businesses and individuals
Situation: Big Apple Tax Associates filed taxes for a small-business client with certain deductions that were not allowed by the IRS. As a result of this mistake, the client was audited and had to pay a significant penalty and hire another tax consultant to fix the issue, which caused financial strain on the business. While “errors and omissions excepted” language can protect you from a claim in some instances relating to slight accounting mistakes or oversights, an error of this magnitude would not apply.
Claim: The client claimed that Big Apple Tax Associates' negligence in providing a competent tax service led to the audit and the resulting financial losses. They filed a claim seeking compensation for the tax penalty, the cost of hiring another consultant, and the legal fees incurred during the audit process.
E&O Payout: $100,000 for client's tax penalty and legal fees
Big Apple Tax Associates' E&O insurance policy covered the payout of the claim, helping the firm avoid a potentially devastating financial burden and protecting it from an inadvertent mistake their work.
Example 3: Delayed Service Delivery
Company: Lone Star IT Services
- Revenue: $3 million
- Employees: 25
- State: Texas
- Industry: IT consulting
- Clients: Small to medium-sized businesses
Situation: Lone Star IT Services was contracted to complete a crucial software implementation for a client within a tight timeframe. But because of poor project management and understaffing, Lone Star missed the deadline. This delay caused the client to lose a major contract with a customer, which incurred financial losses and reputational damage.
Claim: The client filed a claim against Lone Star IT Services, alleging that the firm's negligence in managing the project and late delivery of the software implementation caused significant financial losses because they missed out on a big contract. The client sought compensation for the lost revenue, as well as the legal fees and expenses incurred in defending against the claim.
E&O Payout: $250,000 for client's lost revenue and legal fees
The E&O insurance policy covered the payout, reimbursing the client for lost revenue and the legal fees, without impacting Lone Star IT’s operations and budget.
Example 4: Breach of Confidentiality
Company: Lincoln Legal Advisors
- Revenue: $2.5 million
- Employees: 20
- State: Illinois
- Industry: Legal services
- Clients: Small businesses and individuals
Situation: In the midst of a civil lawsuit, an employee of Lincoln Legal Advisors accidentally disclosed confidential information about their client to a third party. This slip-up led to a premature settlement of the case, causing the client to lose money and their reputation.
Claim: The client claimed that Lincoln Legal’s breach of confidentiality was the direct cause of the premature settlement and the resulting financial and reputational damages. They sought compensation for the financial losses, “pain and suffering” damages, and associated legal fees.
E&O Payout: $150,000 for client's financial damages and legal fees
Lincoln Legal’s E&O insurance policy covered the client’s financial damages and legal fees. The payout helped the firm move on from the mistake, without having to lay off staff or make budget cuts. In instances like this, where it’s one mistake made by a single individual, errors and omissions insurance can be critically important coverage.
Example 5: Defective Product Development
Company: Mile High Tech
- Revenue: $5 million
- Employees: 40
- State: Colorado
- Industry: Product development
- Clients: Tech startups and established companies
Situation: Mile High Tech was hired to develop a client's online retail platform. During the development process, Mile High failed to build proper security measures and left vulnerabilities in the platform. Six months after the site was launched, there was a data breach that exposed customer credit card information, forcing the client to pay for additional development to secure the platform as well as cyber response services. The breaches resulted in financial losses for the client's customers and tarnished the client's reputation. The client was also forced to reimburse affected customers and invest in a more secure platform, further increasing their losses.
Claim: The client filed a claim stating that Mile High Tech's negligence in developing a secure product was responsible for the data breach and the resulting financial and reputational damages. They sought compensation for their customer’s financial losses, the costs of responding to the incident and securing platform, and their legal fees.
E&O Payout: $600,000 for client's financial losses, customer reimbursements, and legal fees
Mile High Tech's E&O insurance paid for the claim, proving the value of this type of policy because the the payout covered not only the client’s losses and legal fees, but also losses of the client’s customers.
Example 6: Inaccurate Appraisal
Company: Bulldog Appraisals
- Revenue: $1 million
- Employees: 8
- State: Georgia
- Industry: Real estate appraisal
- Clients: Banks, mortgage companies, and individuals
Situation: Bulldog Appraisals provided an inaccurate appraisal for a mortgage lender, significantly overestimating the value of a property. The lender, relying on this appraisal, approved a mortgage loan for a borrower who ultimately defaulted. As a result, the lender faced financial losses due to the difference between the loan amount and the actual value of the property. This situation also caused potential damage to the lender's reputation and increased scrutiny from regulatory authorities.
Claim: The lender claimed that Bulldog Appraisal was negligent because the inaccurate appraisal led to the financial losses and reputational harm. The claim sought compensation for the difference between the loan amount and the actual property value, as well as for the legal fees incurred in defending against the claim.
E&O Payout: $400,000 for lender's financial losses and legal fees
Bulldog Appraisals' E&O insurance policy covered the lender's financial losses and legal fees. In an industry as volatile as real estate, E&O coverage can offer much-needed protection against unpredictable market fluctuations that can impact the precision of related professional services.
There are a multitude of other errors and omissions claims examples we could list, but the decision on whether you should purchase this policy comes down to your tolerance for risk and ability to bear losses. If the services you provide or the industry you operate in has a high risk for mistakes or allegations of negligence, it might be wise to invest in E&O coverage.
Including an errors and omissions clause in your company's contracts can also help protect your business and employees from claims of providing inadequate professional services, but there is no guarantee that clause will hold up in a lawsuit. And remember that general liability insurance only covers bodily injury and property damage that you cause others—it will not cover your client’s financial losses.
To get a quick quote on how much E&O insurance will cost, let us know by scheduling a meeting with an advisor or getting a quote online.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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