When you think of insurance, the first thing that comes to mind may be homeowners, auto, life and health insurance. Besides, they are the most politicized and marketed forms of coverage in the world. However, if you are in the process of starting your company, there is one form of insurance that you must add to your checklist of items : Errors and omissions insurance (E&O). 

I learned about E&O insurance when I first decided to take a leap into the real estate market in 2006. Although, I have never had to file a claim, I know several entrepreneurs who have made the ultimate mistake of dismissing the importance of adding this rider policy to their business model, and landed in legal disputes, which exceed the cost of the policy. 

Errors and omissions insurance is similar to malpractice coverage for a doctor or lawyer. In fact, most professions will not allow you practice without it.

"Truly any business that offers a service to a client for a fee, I would recommend getting an E&O insurance," says K.J. VanDerwerken of Movement Insurance.

However, in today's startup world, we read the "good news" and the profitable exits of high growth founders, but the building blocks of protecting your assets along the journey is not a part of the story. 

If you are in the process of starting your business, or your business is growing, and you are committed to scaling soon, here are three factors to consider about E&O inurance.

You need financial protection.

My mentor advised me in the early days of building my company to "never bring your risks to your home." As a novice founder, the message did not fully resonate, until I observed other founders fail. As a leader, you are responsible for everything that goes right and wrong in your company -- from staff to marketing.

Business and partnership disputes are unavoidable. In addition, potential lawsuits are costly. Nothing drains a company more than legal costs, and that's where E&O insurance will protect your company.

VanDerwerken added, "E&O policies are there to protect you by covering your attorney fees, court costs, as well as settlements and judgments." This policy will protect your personal assets.

Mistakes can happen. 

When I was an advisor, I spent each day meeting with executives and other high growth founders providing sound leadership advice. I was fortunate enough to run a reputable company, but I knew at least one client who was in the process of commencing legal action against a fellow colleague due to "advice that did not work." Instead of commencing the litigation against the company, she sued personally, which held up in court.

There are gray-areas in every business model, where you may have misadvised a client/customer, without malicious intent. You may have the best intention, but if you are in any service based business, you are very high risk. You cannot apologize your way out of some mistakes, but the protection of an E&O policy creates a level of professional credibility to handle such an oversight.

It may be required .

If you want to bid on large scale corporate or government contracts, an E&O insurance policy may be required. Corporate RFQ's will ask for a copy of your policy as a way to mitigate any liability on both sides.

"Many companies won't even consider a bid," K.J. added, "or negotiate terms with a firm who doesn't have an E&O policy (construction, architect, tech fields, etc.)."

Published on: Mar 2, 2019
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