Errors And Omissions Insurance (abbreviated as E&O) is a category of professional liability insurance that provides protection to individuals or companies and their staff against claims of negligence or insufficient work when performing their professional duties. The insurance coverage usually covers court expenses and any resultant settlements for amounts set out in the policy contract.
Certified Investment advisors, finance professionals, financial planners and insurance dealers/brokers can get E&O insurance. Investors and Supervisory bodies like the Financial Industry Regulatory Authority (or FINRA) usually require companies and individuals to have E&O insurance. The advantages that accrue from buying this type of insurance differ greatly, depending on the issuing company and the terms of the policy itself. E&O insurance policies might or might not provide coverage to temporary workers, claims arising from any work carried out before it came into effect or claims filed in several jurisdictions.
Lawsuits are commonplace in the financial services sector, irrespective of how unjustified they may be. Sometimes clients may sue a broker or advisor when a particular investment flops, even though the attendant risks were known beforehand and were within the standards set by the client. In such situations, the legal fees can be prohibitive even where an arbitration panel or court rules in favor of the investment advisor or broker. Buying E&O insurance is beneficial in such situations. A company or individual with many litigation problems is considered to have a greater underwriting risk and will probably buy E&O insurance at a higher price or on less favorable terms.
A hypothetical illustration of E&O insurance
A hosting company with data servers that are used by other companies is targeted by hackers who manage to access client data and copyrighted information. The companies whose data is breached by the hackers file a lawsuit against the hosting company with the aim of being awarded damages-citing poor security that resulted in the loss of their information. Fortunately, the server hosting company has taken out an E&O insurance policy and they do an evaluation to find out if there is an item that is not covered. The company has an advantage because its E&O insurance is solid and covers these types of situations. The insurance company foots the bill for legal expenses arising from court cases against various companies. In addition, it bears the cost of any monetary damages awarded by the courts or determined through arbitration.
If the server hosting company did not have the E&O insurance, it would have paid millions of dollars in legal fees and damages. The coverage protected the company from suffering a significant financial blow or even bankruptcy if its finances were not in order.