Q: I want to start a small homebased business to supplement my retirement income. I am finding the cost of errors and omissions (E&O) insurance is prohibitive for homebased businesses (we got one quote of $2,000), but very reasonable for larger, conventional businesses. Why can't I find E&O coverage at a reasonable rate?
A: Before you start shopping for E&O insurance, answer this question: How real is your need for E&O insurance? Does the type of work you plan to do entail much potential for liability? If technology is involved-like being responsible for multimedia arrangements at sales presentations-then we would say yes. But some types of businesses allow you instead to create a client agreement that protects you, making the client assume the risk. I would not do this without having an attorney involved who can help you determine whether such a clause would scare away clients. If, on the other hand, contracts in your industry require E&O coverage, provide a warranty or guarantee, or have clauses that require you to indemnify or hold harmless your clients, you need to start shopping.
The cost of errors and omissions, also known as professional liability or malpractice, insurance, depends on a number of factors:
- The inherent risk of the kind of work you do. For example, an IT professional is more likely to cause a client a larger monetary loss than a training specialist.
- The rating category your work is placed in. We have identified more than 1,500 self-employment careers-not counting unique businesses and services-a far cry from the fewer than 200 categories described on the Web site of Professional Liability Insurance Services Inc., a firm that specializes in this kind of insurance. So you may be lumped into a category that's considered high-risk even if the category isn't relevant to your specific type of business.
- The number of claims filed in your industry. Your type of business may not, even in this litigious era, have had a lot of claims filed, so the insurance company doesn't have claims experience-thus it allows for a huge fudge factor. (This seems to be the case with your $2,000 quote.)
- The state you live in. Insurance rates are set state by state, and some states are more expensive than others.
While the premiums for some types of homebased businesses may be $1,000 and up, many of them should be able to get E&O insurance for costs in the hundreds. Often, trade and professional associations offer the best buys in E&O insurance, so look into joining those first. You can also contact agents and specialized Web sites like the one mentioned above for quotes.