Omissions insurance: Overview, definition, and example
What is omissions insurance?
Omissions insurance, often part of errors and omissions (E&O) insurance, protects businesses and professionals from legal claims due to mistakes, negligence, or failures in providing services. It covers financial losses that clients suffer as a result of an oversight, error, or omission in professional work.
For example, if a consultant provides incorrect advice that leads to a financial loss for a client, omissions insurance helps cover legal costs and potential settlements. This type of insurance is common for service-based businesses, including lawyers, accountants, consultants, and healthcare providers.
Why is omissions insurance important?
Mistakes and oversights can happen even with the most careful professionals. Without omissions insurance, businesses and individuals could face costly lawsuits and financial losses. This coverage provides peace of mind by handling legal fees, settlements, and damages when a client claims that a service was not performed correctly.
Omissions insurance is particularly important in industries where professional advice, recommendations, or services have a direct impact on clients. In some cases, having E&O insurance is a legal or contractual requirement to operate.
Understanding omissions insurance through an example
Imagine a marketing consultant advises a client to launch an ad campaign with a specific strategy. However, the consultant fails to mention a critical compliance requirement, leading to the client being fined. The client sues for damages, claiming financial losses due to the consultant’s omission. In this case, omissions insurance would help cover the consultant’s legal defense and any settlement costs.
In another scenario, an accountant incorrectly files a company’s tax return, resulting in penalties and interest charges. The company sues the accountant for negligence. If the accountant has omissions insurance, it would cover legal fees and potential damages awarded to the client.
An example of an omissions insurance clause
Here’s how an omissions insurance clause might appear in a professional services agreement:
“The Service Provider shall maintain errors and omissions insurance with coverage of at least [specified amount] to protect against claims arising from negligence, errors, or omissions in the performance of professional services.”
Conclusion
Omissions insurance is essential for businesses and professionals who provide services, ensuring protection against legal claims related to mistakes, oversights, or negligence. Without this coverage, service providers could face significant financial and reputational risks.
By including an omissions insurance requirement in contracts, businesses can ensure that service providers have adequate coverage, reducing the potential impact of errors on clients and third parties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.