E&O vs D&O Insurance: What’s the Difference?

You might have heard of both Errors & Omissions (E&O) insurance and Directors & Officers (D&O) insurance. This article explains the major differences between both types of coverage, and why it’s important for businesses and business owners to have both types of coverage if they want to protect themselves from legal liabilities. (Side note: In Singapore, E&O insurance is called Professional Indemnity insurance. E&O is the term more commonly used in the US.)

It’s usually easier to understand how each type of insurance works, and the major differences between them, with an example. Here’s an illustrated situation of how professional indemnity and D&O insurance would each act differently to protect you if you find yourself in trouble.

E&O vs D&O – Sample Case Study: You run a construction company. One of your clients complains about shoddy work that was performed for his construction project, claiming your work caused structural issues with the building. Your client sues you for negligence.

The BCA (Building and Construction Authority) steps in to investigate, and finds that there are indeed structural issues. The BCA also initiates legal action against both you and your company. The BCA is seeking civil penalties against your company.

Your shareholders sue you for mismanaging the company, and causing financial losses to shareholders. As a company director, your shareholders are holding you responsible for not ensuring proper building requirements, which led to equity holders suffering financial damages.

Here’s how your E&O and D&O insurance would be activated to protect you:

1. E&O insurance would pay for legal fees to defend your client’s negligence lawsuit, and the BCA lawsuit against your company
2. D&O insurance would pay for legal fees to defend your shareholder lawsuit targeting company directors

Now that we’ve covered a broad overview of E&O vs D&O policies and the way each works, let’s get into the details of each type of insurance to further explain their differences.

E&O a.k.a. Professional Indemnity Insurance: The essence of E&O/Professional Indemnity Insurance is to pay for legal costs when the company itself is sued. E&O insurance protects the company against claims of negligence, errors & omissions, malpractice, defamation, and improper advice/practices which end up harming clients. This policy extends coverage to mistakes made by all the company’s employees. Beyond salaried and hourly employees, even subcontractors working for your company are also covered. You can thus see that E&O insurance is tailored to protect the corporate entity from a wide variety of legal liabilities!

Some additional examples of where E&O insurance would protect you:

• Your business produces promotional materials for a client, and misspelled the client’s name on all the brochures/fliers/advertisements.
• You provide advice that was incorrect. Even a seemingly simple mistake could lead to a legal claim for negligent or wrongful advice.

This type of insurance is important for companies of all sizes, as long as they provide professional advice to clients. Even if you think the quality of your service is impeccable, and you have strong corporate governance to limit poor advice from being provided, not all of your customers will feel the same way as you. Clients can accuse businesses of providing them sub-standard work, or providing them advice that caused them financial harm. Such accusations could occur anytime, and could come from anyone.

The legal costs to settle these legal disputes are often tremendous, with costs easily totaling in the hundreds of thousands of dollars. This can severely disrupt business operations, particularly so for small businesses. If you run a sole proprietorship, the costs and disruptions are magnified even further. With E&O coverage, the company is safeguarded from such legal risks. You’ll see that this differs very much from D&O insurance, which as its name projects is designed solely to protect senior executives.

Directors and Officers (D&O) Insurance: Unlike E&O Insurance which covers the company, the essence of D&O Insurance is to protect the Directors & Officers of the company against legal liability.

This type of insurance pays for the defense costs for directors and senior executives who are sued personally because of a mistake they made while managing the company. Directors get sued for a wide variety of reasons: negligence, errors & omissions, defamation, mismanaging the company, misusing company funds, and much more.

These claims can be made by a very wide variety of sources: regulators, employees, competitors, shareholders, creditors, etc. D&O insurance is important for all companies, whether they’re small or big, because lawsuits filed against directors will go after the directors’ personal assets! So if you don’t have D&O insurance, your bank account, house, and other personal possessions are at risk. Because directors are exposed to lawsuits from so many directions,

Unlike E&O policies, D&O insurance will cover directors after they retire for several years (usually 5-7 years). This is called run-off coverage. Because your liability as a director doesn’t end after you resign (yes, you can get sued for what you did as a director even if you’re no longer one!), you’ll need D&O insurance to protect you. This is one of the most important parts of liability protection for directors, which is why D&O insurance is a necessary complement to E&O insurance.

D&O insurance will also cover criminal trials if the police charge you with crimes related to your management of your business. Usually, policies will compensate your defense costs only after the court finds you not guilty. This prevents insureds from committing crimes just because they have insurance. Such “alleged criminal acts” coverage is not available under E&O/professional indemnity insurance.

D&O insurance also protects directors from employee lawsuits, while professional indemnity insurance doesn’t. So if directors get sued by their employees for things like wrongful dismissal, harassment, or other reasons, they’ll be protected. The same goes for shareholders; if directors get sued by shareholders for mismanaging the company, causing them financial losses, etc. D&O insurance will be activated to pay for defense costs and damages. E&O/professional indemnity insurance won’t cover such events.

Does a business need both E&O and D&O Insurance? What happens if I only have one type of coverage?

You need both types of policies, because having only one type of coverage leaves you 50% exposed. You need both E&O and D&O insurance to provide you company-level protection and director-level protection. All businesses will need a D&O insurance policy to protect directors from lawsuits that target their personal assets. If you’re running a service business, then you’ll also need E&O coverage to protect you from lawsuits that are aimed at the company.

Many business owners with E&O insurance operate under the mistaken impression that a single policy is all they need. That’s dangerous. Many business-related lawsuits, whether one filed by unhappy customers or disgruntled business partners, will be aimed at both the corporate entity and the directors who oversee the company. If you only have either type of insurance, you’ll only be half-covered if you get sued!

Where can I get great E&O and D&O coverage?

You can get it right here at Provide. We offer broad-coverage, high-indemnity E&O/professional indemnity insurance and D&O insurance. Our prices are up to 25% lower, thanks to our digital platform that creates lower overheads.