What is an errors and omissions clause?
How do you define an error and omission provision?
Where can you find E&O clause examples?
In this article, we will break down the “errors and omissions clause” so you know all there is to know about it!
We will look at what is an errors and omissions clause, look at its definition, look at the E&O clauses in business contracts and reinsurance agreements, what the clause covers, sample clauses and examples!
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What is an errors and omissions clause
An errors and omissions clause (or E&O clause) is a contractual provision typically found in commercial contracts where one or both parties request that the other contracting party carry errors and omissions insurance to protect it against damages and losses resulting from acts, errors or omissions in the performance of the contractual obligations.
In other words, the E&O clause ensures that the parties have or get an insurance coverage protecting them against liability caused from their failure or oversight in rendering services or developing a product.
Common errors and omissions that may lead to financial losses are:
- A party may not believe that the other party adequately performed its contractual obligations
- A party does not provide the expected deliverables as per specifications
- A party delivers a project or renders services with delays
- Clerical errors causing damages
- A party does not disclose material information leading to damages
The errors and omissions insurance is also called professional liability insurance.
These terms refer to the same thing and are used interchangeably.
Clients in certain industries will typically require that their contractual counterparty (or the service provider), contractually commit to providing them with errors and omissions clause protecting them against future risk.
There are certain types of businesses and professions where the E&O clause is seen quite often:
- Professional services firms
- Consulting firms
- Financial services firms
- Software development firms
- Information technology firms
- Investment firms
- Real estate firms
- Architect firms
- Engineering firms
- Law firms
- Accounting firms
- Website designer
As you can see, these service industries where the client pays professionals or a firm of professionals to provide a specialized service.
Errors and omissions clause definition
The definition of errors and omissions clause can be summarized as follows:
An errors and omissions clause is a contractual clause governing a party’s obligation to secure and maintain errors and omissions insurance coverage during the term of the contract or a specified period to cover losses, injuries or damages caused by its failure to perform its contractual duties and obligations caused by errors or omissions.
According to IRMI, the errors and omissions clause is defined as:
A provision, usually in an obligatory reinsurance treaty, stating that an error or omission in reporting a risk that falls within the automatic reinsurance coverage under such treaty shall not invalidate the liability of the reinsurer on such omitted risk.
Errors and omissions in business contracts
Your business may already have errors and omissions insurance or professional liability coverage and that’s great.
In addition to that, it may be appropriate that you include an E&O provision in your business contracts with your clients.
The advantage of that is that you can set proper expectations with respect to your professional liability insurance coverage and avoid possible disputes.
In your business or commercial contracts, you can include an error and omission clause outlining:
- What act or omission will be covered
- Set a cap or limit on the amount of damages your client can claim
- Disclaim liability for specific types of damages such as loss of income or profits
A well-drafted E&O clause can set proper expectations with your contracting party but also limit the amount of money you may be exposed to pay.
The idea is to ensure that your E&O policy does not get triggered too often and for disproportionate amounts of liability.
This will help you in the long run as you will be able to keep your premiums low, get coverage from the best-rated insurance firms and for amounts that truly mitigate your business risk.
E&O provision in reinsurance
In addition to errors and omissions provisions in commercial contracts, you can also have error and omission clauses in reinsurance contracts as well.
Within a reinsurance agreement, the E&O clause governs the eligibility or coverage of an E&O claim.
Generally, the errors and omissions insurance clause found in reinsurance contracts indicates that the parties to the contract will remain liable to the extent the delay, error or omission was rectified upon its discovery.
What does the E&O clause cover
In business contracts, the E&O clauses typically cover financial losses resulting from the failure to perform contractual duties and obligations adequately.
A company hires a professional services firm to have them implement and install a complex software product in its internal environment.
The professional services firm fails to perform its obligations adequately, does not install the software, and causes business downtime, loss of data, and business interruption for several days.
The client can sue the professional services firm for errors and omissions causing financial losses.
This claim or lawsuit can trigger the professional service firm’s E&O insurance.
While financial losses are covered, generally an E&O provision will not provide coverage and protection for personal injury damages.
Financial losses, injuries, damages or claims can arise out of:
- Poor performance of contractual duties
- Non-delivery of services or deliverables
- Unjustified delays or non-attainment of milestones
- Administrative errors
- Non-disclosure of material information in the course of contractual performance
A claim asserted against the E&O insurance is intended to seek compensation for the damages, costs, losses or injuries suffered resulting from the non-performance of the contract obligations.
Errors and omissions clause example
To better understand the errors and omissions clause, it is useful to look at a few examples, errors and omissions sample clauses and contract wording.
Example 1: Errors and omissions clause in sale contract
The Seller shall maintain an errors and omissions insurance policy covering the Transaction through the Closing Date for a period of not less than three years following the Closing Date, and shall pay in advance the premiums for maintaining such policy during such period.
Example 2: Errors and omissions clause service contract
The Service Provider agrees to secure at its own cost and expense errors and omissions insurance, or similar forms of insurance, it determines to be satisfactory to protect against foreseeable risks, errors and omissions in performing project implementation services.
Example 3: Errors and omissions clause in license contract
The Licensor shall obtain and carry in full force and effect commercial general liability insurance and errors and omissions liability insurance which shall protect Licensor for any delays, errors and omissions. Such insurance shall be issued by an insurer licensed to practice in the United States and will be provided by a company or companies having a financial rating of not less than A- in the most current edition of Best’s Key Rating Guide and shall include product liability coverage.
Errors and omissions clause FAQ
What is a reinsurance E&O clause
Reinsurance is the process where several insurance companies share insurance coverage risks by purchasing insurance policies from other insurers with the objective to reduce overall liability risk.
In most reinsurance agreements, you’ll have an errors and omissions clause allowing a party to correct inadvertent mistakes without breaching the terms of the reinsurance agreement.
The parties are protected from inadvertent E&O consequences to the extent the error is rectified upon discovery.
What is meant by E&OE on an invoice or document
E&OE in an invoice stands for Errors and Omissions Excepted.
This abbreviation is used to provide a disclaimer to the receiving party that any mistakes or errors on the document are unintentional.
The goal is essentially to reduce legal liability for possible mistakes, incorrect or incomplete content.
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