Errors and omissions insurance claims and lawsuit examples

The legal "causes of action" for an errors and omissions lawsuit can vary from professional negligence (such as an accusation your work was careless or didn't meet industry standards) to a breach of contract (a customer accuses you of not honoring the promises you made in a contract). To make their case, the plaintiff will have to establish that:

• Your work failed to meet a client's expectations of reasonable care, industry standards, or obligations outlined in the contract.
• The plaintiff suffered financial damages.
• The damages are related to the fact your work didn’t meet professional standards. If the plaintiff suffered these damages regardless of your work, you aren’t considered liable.

If the plaintiff is able to prove these points, you’ll likely lose your case and receive a financial penalty from the judge. Even if you win your case, you’d still have to cover your legal defense and court costs, which can prove quite expensive. That’s why so many small business owners in the professional services sector rely on an errors & omissions policy to defray the expenses.

In many cases, a small mistake can escalate into an expensive lawsuit. Accusations of misrepresentation, oversights, and mistakes can happen to business owners in almost every industry.

Here are a few examples of what can lead to an E&O lawsuit:

• Poor communication. If a client doesn’t fully understand your services and the expected outcome, they could have unrealistic expectations of your work. If those expectations aren’t met, they could sue your business.
• Clerical errors. Even a small error in a contract, email communication, or written letter could cause a miscommunication or a delay in your work, followed by a complaint from your customer.
• Failure to disclose. If you provided inadequate instructions to a client, such as when describing how to use specialized equipment, the client might blame you for any damage caused by improper use of that equipment.
• Late work. Disruptions, for any reason, could leave you vulnerable to a client lawsuit if you fail to deliver your work on time. This can even happen if the situation is out of your control, such as a supply chain issue that limits your ability to deliver products or services.

As soon as you receive a formal complaint, you should immediately contact your insurance provider. Most E&O insurance policies stipulate that service providers have the duty to defend you. That means your insurance carrier will find a lawyer who specializes in E&O / malpractice lawsuits to provide you with legal counsel.

Your lawyer will read through the formal complaint, which includes information such as:

• The names of everyone involved
• A summary of the case's facts
• A list of allegations (called "counts") with the legal theory (laws and previous court decisions) to back them up
• The demands – usually an amount of money – of the plaintiff

After the claim has been evaluated by the appropriate parties, there are a few options:

Answer the claim. You either admit to or deny the allegations of the claim and explain why.

Try to dismiss the claim. Your lawyer may try to have the claim dismissed on legal grounds.

Countersuit. Depending on the situation, you can turn around and sue the plaintiff.

Do nothing. The judge may award the plaintiff everything they're asking for in what is called a "default judgment."

If the claim is dismissed, you have nothing more to worry about. If the claim isn't dismissed, you'll have a meeting with the court to set deadlines. One of the deadlines will be for a mandatory settlement conference to settle the dispute out of court.

If you can't reach an agreement during the settlement process, you'll enter the period of "discovery," where you and your lawyer gather evidence for your defense. This might include records (like healthcare records, sales receipts, invoices, etc.), written testimony, and interviews with the attorneys.

You can decrease your odds of an errors and omissions lawsuit by implementing these risk reduction measures:

• Always sign a contract. Make sure your contracts clearly define your obligations, deadlines, and compensation, so you can manage expectations from the start. Work with an attorney to ensure your contracts are legally sound.
• Leave a paper trail. Document all communication with clients, including verbal communications like meetings and phone calls. A paper trail helps clear up disagreements when two people remember a conversation differently.
• Be transparent. If you keep clients up to date on your progress and potential pitfalls, they are less likely to be surprised by the outcome of a project. Transparency also builds trust, which helps deter lawsuits.
• Be careful. When a mistake in your line of work can have far-reaching consequences, it pays to check—and double-check—your work. Though it may take a little longer, eliminating errors and making sure you're doing your job correctly helps reduce the chance of a lawsuit.

There are three ways to win an E&O lawsuit:

1. Get the case dismissed based on legal reasons. Perhaps your lawyer believes it's baseless, or maybe too much time has passed between the incident and the filing (this is called the "statute of limitations").
2. Go directly to judgment. This is only for cases where the facts aren't disputed. The judge will decide how much to award the plaintiff without a jury. E&O insurance covers the cost of judgments.
3. Settle the case out of court. This is usually the cheapest option, though you'll likely still have to pay the plaintiff a settlement (which errors and omissions insurance covers up to the coverage limits).

Essentially, you can decide to settle a case at any point during the process – even during the trial. Most of the time, a settlement is the most cost-effective solution for everyone involved.