In essence, Error and Omission Insurance (E and O) is professional liability insurance and is the price a company pays for peace of mind. It protects the insured from claims made by a client that holds the business responsible for not fulfilling a contract as promised. To any business that contracts with others, and could not pay a tremendous settlement out of pocket, this form of insurance is essential.
Many businesses have the confused notion that General Liability Insurance covers contract liabilities, this is not the case. General Liability Insurance covers injuries or property damage that is the result of negligence on the premises of the insured business. This may also include injuries resulting from the use of products manufactured or distributed by the business, or even injuries that happen to employees during the normal operation of a business. General Liability Insurance does not cover any error or omission committed by a negligent business that is party to a contract.
Most businesses are not capable of paying huge damages in a contract dispute. Companies strive to grow their business by building solid reputations, increasing incomes, and enhancing their image and products. Companies enter into many contracts with all sorts of other businesses and individuals as a means of expand their businesses. While expanding their businesses is profitable, it also increases the risks of errors as well as the increased possibility of breaking a contract and becoming liable.
A contract is a promise to perform a service or other activity in exchange for compensation. Failure to provide a contracted activity by a business can result in a claim being filed for damages by the injured party. Claims are a request for monetary settlement in exchange for any damage resulting from an unfulfilled contractual promise.
E and O may help to avoid claims becoming lawsuits when communications break down and each side must hire legal representation. Law suits are expensive, to all parties, both in time and expense, especially if they finalize in a court. Legal fees have risen in the recent past as a result of more service and product suits being filed with the courts. Even long respected companies are experiencing litigation for relatively oversights that had been disregarded previously.