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I’m opening a small consulting firm in California. Do I need errors and omissions insurance if I already have general liability insurance?

General liability insurance provides protection in the event that you are held financially responsible for bodily injuries or physical property damage. But what about other kinds of damage, such as financial lossesresulting from inadequate work or negligence? Individuals and businesses that provide services for a fee need specialized insurance to cover them for professional liability—and that’s what errors and omissions (E&O) insurance does. In fact, it is often referred to as professional liability insurance.

Just about anyone who provides fee-based services should consider E&O insurance: printers, accountants, financial advisors, tax preparers, insurance agents, realtors, consultants, lawyers, software developers, architects, and building trades contractors, to name a few. The malpractice insurance carried by doctors is a specialized form of professional liability insurance.

Everyone working for me is experienced, careful and honest. They’re not likely to make any costly mistakes. Why should I pay for E&O insurance?

Everybody makes mistakes upon occasion. Consider this example:

A printing company in southern California is hired to produce 10,000 copies of a brochure for a large roofing company, along with dozens of large magnetic signs for the company’s vehicles. The layout and ad copy were created by a local advertising agency and sent to the printer electronically. Somewhere along the line, a typo was not caught by the advertising agency or by the printer. Nobody noticed the mistake until after the brochure was in widespread distribution and the roofing company vehicles were driving all over California, proudly proclaiming “We do doors and widows, too!” When a photo of one of his trucks bearing the unfortunate sign went viral on the internet, the roofing company owner decided to sue both the advertising agency and the printer, not only for the cost of correcting the error and printing new brochures and signs, but also for making his company an object of ridicule. Without errors and omissions insurance, the two defendants would have to foot the bill for any damages awarded by the court.

There are countless examples of similar small mistakes that can end up costing a business big bucks. And the financial repercussions of bigger mistakes can be crippling, especially for smaller firms. The relatively low cost of purchasing E&O coverage is a bargain in comparison.

If I buy E&O insurance in California, does it cover my entire staff?

E&O insurance typically covers you, the business owner, and all of your employees, whether they are salaried or hourly workers, permanent or temporary, as well as any subcontractors performing work for your business.

What is not covered by an errors and omissions policy issued in California?

E&O policies do not cover bodily injury or property damage or damages stemming from illegal, dishonest, or fraudulent acts, like deliberate copyright or patent infringement or false advertising. It also does not provide coverage for matters related to employment, which would fall under your Workers’ Compensation plan.

When and how does an E&O policy pay off?

Some California E&O policies are structured so that you get reimbursed after you have settled the claim and made payment to the disgruntled client. This can pose cash flow hardships for smaller companies. Some policies, on the other hand, pay the client directly, without you having to wait for reimbursement. This is an issue you should address when you inquire about buying E&O insurance.