You’re looking to safeguard your business with a business insurance policy. Of course, it’s a wise move. But with all these acronyms and similar-sounding insurance policies, choosing the coverage you genuinely need can get confusing.

On that note, let’s break down D&O insurance and E&O insurance – only one letter separates them, but their coverages are notably different. 

First, let’s review what they cover and whether your business needs D&O insurance, E&O insurance, or both.

Do you need management liability insurance or errors and omissions insurance?

What Is Directors and Officers (D&O) Insurance?

Directors and officers (D&O) insurance, commonly called management liability insurance, provides financial protection to a company and its directors and officers who have been sued due to an error (or alleged error) they made while managing a company.

D&O insurance can cover a variety of claims. Here are some situations where a D&O insurance policy could provide protection when facing damage claims:

  • Unfair business practices
  • Making decisions without the necessary authority
  • Negligent professional behaviour
  • Misleading statements or inaccurate reporting
  • Acts of harassment or discrimination
  • Breach of legal or fiduciary duties
  • Conflicts of interest
  • Release of non-public information
  • Poor management of funds
  • Bad investment decisions
  • Employment-related claims

What Type of Small Business Needs D&O Insurance?

Any small business with a board of directors, officers, or key decision-makers should have D&O insurance, such as:

  • Small, publicly held companies can face lawsuits from employees, shareholders, or other stakeholders for alleged mismanagement, wrongful termination, or other decisions made by directors or officers.
  • Nonprofit organizations typically have a board of directors that makes crucial decisions. D&O insurance helps protect board members from personal liability in case of lawsuits related to their choices or actions on behalf of the organization.
  • For startups, the decisions made by founders, directors, and officers can significantly impact the company’s success.
  • Family-owned businesses with multiple family members involved in the management and decision-making process can benefit from D&O insurance to deal with disputes or allegations of mismanagement.
  • Professional services firms like consulting companies, law firms, and accounting practices often have a board or partners who make crucial decisions. 
  • Technology companies with executive decision-makers in product development, intellectual property, and investor relations can lead to legal disputes.
  • Franchise businesses may have a board or leadership team responsible for making decisions that impact multiple locations.
  • Community and homeowners associations with boards of directors that make decisions affecting the community.
  • Schools, colleges, and educational nonprofits often have boards or trustees making critical decisions.
  • Medical practices, clinics, and healthcare organizations with a board of directors or management team can benefit from D&O insurance to protect against claims related to healthcare decisions.
  • Real estate companies with multiple stakeholders, including brokers, property managers, and executives, can face legal disputes related to business decisions.
  • Manufacturers may have a board or management team making important decisions about production, quality control, and other aspects of the business.

What Is Errors and Omissions (E&O) Insurance?

E&O insurance, or professional liability insurance, is designed for various small businesses and self-employed professionals. 

Here are some examples of claims that may be covered through E&O insurance, covering both legal defence costs and settlement fees:

  • Misconduct in service
  • Erroneous work or advice
  • Negligent professional behaviour
  • Omitting important details in service or advice
  • Failure to provide service as promised

What Type of Small Business Needs E&O Insurance?

E&O insurance, or professional liability insurance, is designed for a variety of small businesses and self-employed professionals. Here are some examples of businesses and professionals that may benefit from E&O insurance:

  • Management consultants, financial advisors, and business consultants to protect against claims of providing incorrect advice or recommendations.
  • Real estate professionals may face claims from clients who allege errors or misrepresentations in property transactions, contracts, or disclosures.
  • Financial planners and investment advisors giving financial planning, investment advice, or wealth management services.
  • Accountants, bookkeepers, and tax professionals can face claims related to errors in financial statements, tax returns, or accounting advice.
  • Architects, general contractors, and engineers in the construction and design industry may face claims related to design errors, building code violations, or construction defects.
  • IT consultants, software developers, and technology experts may face claims for system failures, data breaches, or errors in software development.
  • Allied health professionals, beauticians, therapists, and other health and wellness providers may face medical malpractice claims or errors in patient care.
  • Designers, artists, content producers and creative professionals may face claims related to copyright infringement, design errors, or failure to meet client expectations.
  • Event planners may be held liable for errors in event coordination, such as double bookings, vendor disputes, or failure to meet client expectations.
  • Educational institutions, teachers and tutors may face claims about curriculum design, instructional materials, or academic advice.
  • Environmental consultants providing services related to site assessments, remediation, or regulatory compliance may face claims for errors or oversights.
  • Landscapers, lawn care professionals, and arborists need protection from claims arising from their professional services.

What Are the Differences Between D&O Insurance and E&O Insurance?

The two policies are separate from the coverage they provide. Here are the primary differences:

D&O insurance claims can come from different parties

D&O insurance claims often come from employees but can also be made by other sources, such as regulators, competitors, shareholders, and creditors. 

On the other hand, E&O insurance claims are generally made by third parties – namely, clients.

Only D&O insurance covers some criminal trial costs

D&O insurance can cover the defence costs in criminal trials if you’re found to be not guilty. However, E&O insurance does not offer comparable coverage for employees.

Examples of How D&O Insurance and E&O Insurance Protect Small Businesses

Let’s put this into context with a couple of examples of how each type of insurance can protect you. First, consider this D&O coverage example:

Say you’re the CEO of a publicly traded company struggling to keep afloat in a challenging economic environment. Shortly after reporting the company’s latest quarterly financial results to shareholders and lenders that showed your firm is managing to weather the challenges it faces and is reporting moderate growth, the company files for bankruptcy protection. 

Your shareholders and lenders are outraged and launch a lawsuit against you and your board of directors for misrepresentation and making a misleading statement. In this scenario, a D&O insurance policy could provide you and the board with financial support for your legal defence.

Now, let’s consider the following example of how E&O insurance can protect you:

Suppose you are an operations consultant advising a company on how to launch a new product in the market. Your customer is a small business and relies on this new product launch to keep them afloat.

Based on your advice, the business owner makes a series of changes to the launch plan. The launch fails, and the business goes bankrupt. The owner blames you for bad advice and alleges you are at fault for their business going bankrupt and losing $100,000. In this case, it’s an E&O policy that would provide you with coverage for your legal defence and the potential settlement.

How to Get the Business Insurance Protection You Need Fast

Zensurance can help get the D&O insurance and E&O insurance your business requires quickly and provide you with a certificate of insurance verifying you’re covered.

Fill out our online application for a free quote. Our knowledgeable team of brokers will shop the market for you to find the low-cost policy you need and customize it to suit your business or profession.

— Updated November 17, 2023.

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About the Author: Justin Tisdale

Justin Tisdale is a Team Lead, Professional Lines, at Zensurance.