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Errors and omissions insurance (E&O) is a type of professional liability insurance that protects companies and their workers or individuals against claims made by clients for inadequate work or negligent actions. Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract.
In the financial industry, lawsuits happen, regardless of how baseless the claims may be. Clients sometimes sue an advisor or broker after an investment goes sour, even if the risks were well-known and within the guidelines established by the client. In these cases, even if a court or arbitration panel finds in favor of a broker or investment advisor, the legal fees can be very high, and E&O insurance is vital in these situations. A person or company that has had numerous litigation problems has a higher underwriting risk and is likely to find E&O insurance more expensive or less favorable in its terms as a result.
A company that hosts servers used by other companies for data purposes is breached by hackers who gain access to proprietary information and client data. Those companies affected by the hack sue the server hosting company for damages for inadequate security leading to the theft of their information. The server hosting company has an errors and omissions insurance policy and reviews it to see what the policy does and does not cover. To the company's benefit, its errors and omissions policy is robust and covers such situations. The insurance company pays for the legal expenses involved in the court case against multiple companies; likewise, the insurance company pays for any monetary damages rendered by the courts or settled in arbitration.
Without the errors and omissions insurance, the server hosting company may have been liable for millions of dollars in damages plus the fees associated with a legal team. The errors and omissions coverage helped the company avoid a substantial financial hit and even bankruptcy, depending on the company's finances.
Original Source: http://www.investopedia.com/terms/e/errors-omissions-insurance.asp