Understanding Errors and Omissions Insurance
It is inevitable that even the most cautious designer, installer or kitchen design specialist will make mistakes from time to time. However, there are ways in which kitchen and bath professionals can attempt to limit liability arising from their errors or omissions. One such way is to purchase Errors and Omissions insurance (E&O), also known as Professional Liability insurance. E&O insurance is separate and distinct coverage from any Commercial General Liability policy (CGL) that you or your company may currently possess. While many may have heard of E&O insurance, very few people truly understand what it is. E&O is a piece of insurance that covers you individually, or your company, in the event that one of your clients sues you or otherwise holds you liable for a service that you provided, or failed to provide, that did not meet the expected or promised results. Most doctors, accountants, architects and engineers have some form of E&O coverage. E&O may also be beneficial to kitchen and bath professionals. For example, assume that your client has requested cabinets with a walnut finish. However, when the units are delivered, they turn out to be cherry. Your client had wanted the cabinets delivered and installed prior to a large social event that she was hosting at her house. Even though you offered to replace the cabinetry at no charge, she sues you, alleging that your negligence has resulted in her sustaining monetary damages as well as the loss of use of the cabinets for her special event. Without E&O coverage, you may end up paying to defend the claim out of your own pocket. It is important to note that the type of loss described in the example above would not be covered under a CGL policy, which typically contains exclusions for work product. If, however, you had a properly construed E&O policy, you may be entitled to coverage that would include the payment of all court costs, judgments, verdicts or settlements and attorneys' fees. While an E&O policy may seem like a panacea for any negligence on your part, you must be aware that insurance companies typically want to avoid paying out large sums of money on their insureds' policies. The way they avoid doing so is by building into their policies numerous exclusions that may be quite complicated for the average business owner to fully understand. Although E&O policies vary significantly, typical policies will not cover you for liability that you assumed under any contract or agreement unless you would have been legally liable in the absence of the contract because of your negligent act, error or omission in the performance of your professional services. This exclusion would apply if you entered into a contract that contained penalty clauses, guarantees, warranties, liquidated damages or certain other provisions. Other exclusions include liability (1) for damages or injury to real or personal property that is in your care, custody or control, or that you are repairing; (2) arising out of any dishonest, fraudulent or criminal act or omission, or for other intentional wrongful acts; and (3) for punitive or exemplary damages, fines or penalties or any multiplication of compensatory damages. E&O policies may contain a host of other exclusions of which you should be fully aware before purchasing the coverage. It is critical that you communicate to your insurance broker your needs for coverage under an E&O policy. You should explain to your broker exactly what services you provide and ask him to explain all of the limitations and exclusions contained in the policy to you. Be prepared to provide copies of your contracts, agreements, purchase orders and other documents to the insurance underwriters. They typically review such documents to determine their risks associated under the policy. Generally speaking, the higher the risk, the higher the premium. Determining whether an E&O policy is right for you takes a good deal of thought and some in-depth conversations with your insurance broker. E&O policies can protect you and your company from various errors and omissions and save you a good deal of money in the event that you are sued. However, high premiums and confusing or limiting exclusions may impact your decision to purchase a policy. Ultimately, so long as it is economical, having too much insurance coverage is better than being underinsured. Nevertheless, no amount of coverage can protect you from everything. Thus, the best way to limit liability is to utilize properly constructed contracts and to pay close attention to details when dealing with customers.