Do I need errors and omissions insurance?

Question

I am starting a consulting business. If I have a really good contract that my customers sign, can I get away with NOT buying errors and omissions insurance? I am providing intellectual property, and they are trusting what I say...

Answer 1

No.  You can't opt out of legal responsibilities.  People can't waive their right to sue you, if you really mess up.   That paper won't hold up in court.

Having said that, you need a good lawyer, and a good account.  It's highly possible you can structure things so that if you make a bad mistake, they can't get anything except a judgement.  You can just say, "too bad, so sad" and walk away.  It's certainly not the ethical or moral thing to do, and it might end up costing you more to set/run things that way.  AND, if a  judge thinks you were doing it to s***w people over, you could be looking at jail time, even if you keep the assets of the business.

That's why a good lawyer is important.

Answer 2

You should carry E & O because what you think is a 'good' contract is subjective and certainly can't take into account all the contingencies of conducting your business.

Plus a good contract can't cover errors you make as a human if you misstate something or forget a certain part of your transaction.

The coverage is intended to cover accidental slip ups that can occur regardless of how strong you think your contract is.

Answer 3

You should most definitely obtain Errors and Omissions (E&O) insurance (sometimes called Professional Liability). This type of policy covers damages you cause others through your business actions other than bodily injury or proerty damage, which would be covered by a Commercial General Liability (CGL) policy. So if a a ballet instructor orders one of their students to perform a move without proper instruction, and the dancer injures themself, a CGL policy would respond since the damages suffered were bodily injury. Let's say you recommend that a client purchases product 'X' to help their business become more efficient (you never said what type of consultant you are, but I'm sure you can relate if this is not exactly your field). The client purchases the product but it turns out the product is completely inappropriate and incurs costs not only to remove the product, but for lost sales/production/etc. An E&O policy would respond in this type of situation. The client did not suffer any bodily injury nor was his property damaged, however he did suffer financial loss from following your professional advice.

No judge will accept a clause in a contract that essentially states "I will do whatever, you will pay me whatever and you cannot sue me no matter how bad I s***w up." This clause only benefits one party with zero benefit to the other party, which invalidates a contract. Get the insurance.