We live in an increasingly litigious society. For small businesses in particular, the chances of getting sued for professional liability are greater than ever. However, most small businesses - with the notable exception of health care and real estate - are not aware of how to construct an insurance portfolio that will mitigate the risks of such litigation. Learn the role of errors and omissions (E & O) insurance, how to safeguarding your small business and how improvement in business processes must accompany an E & O insurance purchase.
Your Insurance Portfolio
Unfortunately, there's no such thing as a one-size-fits-all insurance product for small businesses. Instead, you have to construct an insurance portfolio by buying several distinct insurance products. The following categories are most useful to a typical small business:
- Property insurance (example: pays for fire damage to your building)
- General liability (example: pays for damage you commit to someone else's property)
- Errors and omissions (example: pays for a civil lawsuit settlement arising from a faulty business practice)
- Workers' compensation insurance (example: pays your legal fees if workers sue you)
The Scope of E&O
E&O is a limited insurance category designed to protect you against professional error. In medical circles, it's widely known as malpractice. Professional error is a risk in any business environment. Here are a few examples to give you an idea of what counts as professional error:
- Shipping a valuable customer order to the wrong location
- Destroying a customer's prized rose garden in the course of mowing the lawn
- Selling a bug-ridden piece of software that causes a customer's computer systems to break down
- Hiring a subcontractor who causes damage to a customer's water main while performing a routine plumbing job
There's an infinite number of possible professional errors, many of which may be insignificant. Some of them, however, will most certainly cause a customer to sue you. The benefit of E&O is that it offers you protection across the spectrum of legitimate professional errors, and even protects you against frivolous lawsuits by paying for legal costs.
Who Needs E&O?
While errors and omissions insurance has been a hot item for doctors, lawyers, financial services professionals and realtors, all businesses face professional liability risk. To determine whether you need E&O, ask yourself : "Can I afford to wage or lose a civil lawsuit arising out of professional error on my part?" For the majority of small businesses, the answer is no. That's because the American legal system tends to severely punish professional error with award judgments in seven figures and up. Even if you win a lawsuit, there's the question of paying the lawyers.
If you subject E&O to a quick risk-benefit analysis, you'll see that the annual premium, which is generally affordable, yet varied depending on how many individual employees you insure, and the nature of your business, is well worth the protection. Remember, the vast majority of small businesses can be shut down by a single unfavorable ruling in court.
E&O Risk Management Strategies
Buying errors and omissions insurance is an important component of risk management. But risk management extends beyond the purchase of insurance. Consider the following low-cost strategies to further reduce your exposure to errors and omissions, and win more customer goodwill in the process:
- Let customers complain directly and immediately. Talking to frustrated customers - whether over an 800 number, email, or instant messenger -- reduces the likelihood of a lawsuit and increases their satisfaction with your company.
- Be aware of contractually-based risk management fundamentals. Some E&O lawsuits originate from false promises or misleading information provided by the company. Be careful in generating contracts for customers. Never make absolute promises and never guarantee any factor, such as a delivery date, over which you lack complete control.
- Cut down on errors and omissions in your business processes by rooting out inefficiencies in your operations. Don't run your business on paper records and verbal commitments. Scan all documents into a computer, record all contracts and pay the utmost attention to detail. This will not only help your business but also cut down on the risk of an E&O lawsuit.