Top causes of Errors and Omissions (E&O) lawsuits

If you work in any business providing services to clients or businesses, Errors and Omissions insurance* might be a must-have policy.  Also known as Professional Liability insurance, this type of policy protects your business against claims of negligence, misrepresentations, or mistakes. Professional liability claims are typically made by clients who allege some form of financial damage as a result of your services, products or employees. However, as well as having financial protection coverage in place, it is useful to know the main reasons why people launch errors and omissions lawsuits, so that you can make sure you avoid falling into errors that will end up in court. Not only is court action time-consuming and stressful, it can be financially damaging even if you have insurance as you will often have to pay deductibles if you are found at fault, your insurance premiums will rise, and your business may well suffer reputational damage causing long-term financial losses.

There are numerous legal grounds for bringing errors and omissions suits against a service provider, ranging from allegations of negligence (i.e., you didn’t take enough care over your work or your work didn’t meet the generally accepted standards in your sector) through to allegations of breach of contract (i.e., you failed adequately or at all to provide the services for which you were contracted). In order to be successful, a complainant must prove three things: firstly, that your work was unsatisfactory in terms of satisfying the reasonable expectations of your client, meeting the accepted standards in your industry, or fulfilling your contractual obligations; that the complainant has experienced provable damage or hardship; and that said damage or hardship can be directly linked to your errors or omissions. If all of these conditions are met, you will be liable to make good the damage caused. However, if the case against you is not proven, you will still be liable for paying court fees and your defense lawyers.

There are a number of frequently occurring mistakes that may lead to errors and omissions lawsuits being brought against you. These include:

1. Inadequate communication

You might feel that you have given your client a realistic description of what you can do for them and what it will cost, but if this is not clearly communicated clients may feel cheated and take legal action. Make sure that everything you are offering your client is set out in writing, and has been fully understood, and ask your client to sign a document agreeing to the level of service you are offering them as well as what it will cost.

2. Paperwork mistakes

The course of a real estate deal can be severely disrupted by the simplest clerical errors, for example putting incorrect dates on contracts, sending messages to a misspelt email address, and so on. Make sure that you and anyone working for you checks and doublechecks paperwork and keeps copies of all communication in case it should be later needed in your defense.

3. Inadequate disclosure

You may find yourself facing a lawsuit if you failed to disclose to your client information that can be shown to have caused them hardship due to your nondisclosure, for example if as a Real Estate agent you are aware that a property’s basement is liable to flooding but have not informed the client of this.

4. Delays

Many real estate deals are time dependent, particularly if the buyers and sellers are part of a chain, so any errors caused by tardiness on your part can be costly, firstly for the client and then for you when they take legal action to regain their losses. Make sure you draw up a schedule that the client signs off on, and stick to it.

Examples of errors and omissions lawsuits include:

1. Breach-of-contract

A start-up company launched $100 million breach of contract lawsuit against another company with which it had signed a partnership. The start-up had arranged to purchase consumer research and data from its partner company, and to help with data analysis. An exclusive partnership agreement had been signed, but the start-up claimed that when its partner realized it could make more money elsewhere, it tried to pull out of the deal, leading to a fall in share values, employee layoffs and the suspension of some activities.

2. Missed deadlines

A major US company contracted an IT consultancy firm to build a new website and mobile apps, however delays meant that the project fell well behind schedule and eventually the client company withdrew from the deal, subsequently launching a lawsuit claiming the IT company had failed to provide services for which it had been contracted and that the inadequate services it had provided were unsatisfactory. The case is still before the courts, but whether the IT company wins or loses it will face many millions of dollars in legal fees.

3. Professional negligence

A major retailer filed a lawsuit against an electronics company, claiming that several of its stores had been damaged by the electronics company’s products catching on fire when on display. The retailer claimed that the electronics company should have been aware of the faults that caused the fires and addressed them, as well as warning the retailer. The case was settled out of court.

The main takeaways are that you should always have Errors and Omissions insurance in place, but you should try to avoid using it by ensuring you have a clear contract with your client that sets out all the services you will provide, their timeframes and what they will cost, that you keep records of all communications with clients (including telephone calls and in-person conversations) so that you can show what you agreed on, and keep your clients fully informed at all times on how a project is progressing and any potential stumbling blocks.