What to Report and When
It’s late on a Friday afternoon and the phone rings. Picking up, you immediately recognize the voice of a client. He is often confused about the services your company provides and doesn't always understand the scope of your work. But tonight, he says his company has experienced a financial loss due to a mistake that points directly back to you.
Before panicking, pick up a pen. Start taking notes, and timestamp every conversation you have with this client (it’s a good habit to begin before problems occur). The E&O insurance policy you set up will protect you and your coworkers in cases of inadequate work or negligent actions. Errors and omissions insurance is a form of liability insurance. It protects your company against the costs of a claim made by a client.
Anyone who doesn't work for your business can file an E&O claim against you if they feel that they have been negatively affected by your work. Errors and omissions claims are made by the people who pay for your services. However, contact your insurance agent as soon as you become aware of an incident.
What Incidents to Report
An incident is any mistake leading to a financial loss for your client. This loss can include business income, a customer, or future sales. The types of claims against a business like yours will depend on the services or products provided and the professional standards of your industry. Let’s look at a type of incident that could lead to an E&O claim.
Real Estate Appraisal
Since a home's list price is a reflection of the market, it might seem that all property appraisals are subjective. However, there’s a lot of money at stake for the banks, and appraisals are formulated through a series of complicated calculations. Therefore, mistakes happen in the appraisal process which can result in a home buyer not qualifying for a bank loan or being required to pay the cash difference between the purchase price and appraisal. Emotions run high in home buying, and this means real estate appraisers are a target for lawsuits.
An experienced appraiser knows that any of these occurrences can affect a home appraisal -
- Inaccurately measuring the square footage of a home can under or overestimate the value.
- Not including replacements, renovations, and upgrades to accurately reflect the value. On the other hand, failing to properly describe the condition, unique features, and amenities of the property will influence the appraisal.
- Allowing private conversations with realtors to influence the appraisal.
- Failing to analyze and report changing market trends. For example, not indicating that property values are declining within the market area.
- Improperly describing neighborhood boundaries.
- Not confirming zoning, or if the zoning description does not match local zoning classifications.
- Using poor quality or inadequate data for the appraisal. Fabricating missing data.
Claims can be made over missing data and typos, whether intentional or accidental. Mistakes can include misjudgments that someone at a competing company would catch because legal determinations will be based on the industry standards. Any time you find an error in your own work that could lead to a claim, communicate directly with your E&O agent.
Professional Consulting Services
Professional Liability insurance includes all non-medical classes of business, consultants, and contractors and covers claims related to your business’ products or services. In your long career, think about how many of these you’ve seen -
- Oversights and errors (admin/clerical errors)
- Undelivered services
- Services not measuring up to industry standards
Errors & Omissions insurance covers these incidents for a multitude of professional industries. Remember, a mistake is any incident leading to financial loss for your client.
For example, let’s say the phone call you received last Friday was from a disgruntled homeowner. They are unhappy with the results of your appraisal. They believe that it underestimates their home’s value because it fails to mention several important features, like the renovated master bathroom. In this case, the homeowner could file a complaint, leaving you responsible for defending your valuation - which may not be at fault. If the homeowner can show that you've caused financial loss, they will sue you for damages.
Misunderstandings, typos, and missed deadlines are the most common situations that lead to professional liability lawsuits. Fortunately, coverage under an E&O policy protects your business and your clients’ company. Whether you recognize an error or omission on your own or the client calls to report an incident, document (and timestamp) all conversations and contact your agent immediately.