Don’t Let a Large E&O Judgment Kill Your Business

Most small financial-services businesses operate on slim margins. They lack a surplus of commissions, fees, and other income over their monthly expenses. What’s more, firms often have limited assets to convert into cash when emergencies arise.

Since they essentially operate on a high wire with no financial safety net, they are vulnerable to unexpected events, including demands from aggrieved clients. Such events, called errors-and-omissions claims, occur when a customer believes you either made a professional mistake or failed to deliver a promised service, which cost them money. The result of losing such a claim—a large settlement or legal judgment—can be severe.

Case in point: According to the National Center for State Courts, the average small-business E&O insurance judgment totals over $140,000, not including legal fees. If your company faced expenses this large, what would you do?

  • First, you could try to tap your cash accounts. But how many firms have that much ready cash or available cash equivalents?
  • Second, you could attempt to convert tangible assets into cash. But most financial-services practices typically don’t have assets other than their good name and future anticipated revenue in the form of commissions and fees. Quickly transforming these assets into ready cash can be difficult. If they own their building or the land it sits on, they could put those assets up for sale. But that could take weeks or even months, and might generate lower proceeds than expected based on current market conditions.

Bottom line, if you don’t have the cash and can’t liquidate assets, how would you pay for a large E&O settlement or legal judgment? You can’t! You’d declare bankruptcy—and try to get on with your life.

But even under that scenario, an E&O dispute can haunt you for decades. You might find it difficult to borrow money to restart your business. Or you might have trouble finding a job in a new industry.

Let’s now paint a happier scenario. Imagine you have an E&O insurance policy to pay for your attorney and settlement/judgment costs. What a difference! Now you can avoid bankruptcy and continue in your business as before. Sure, you might carry scars from the experience. But you’d have avoided bankruptcy. Which option is more appealing? The latter, of course. That’s because E&O insurance can spell the difference between bankruptcy and longevity.

A Full Policy of E&O Insurance Is Your Best Defense

A full policy of E&O insurance is your best defense against the scenario we just described.

It protects your financial-services business in three ways.

  • First, it insulates you against the financial impact of making a professional mistake.
  • Second, it protects you in the event you fail to deliver on your contracted promises.
  • Third, it covers you should you fail to perform your duties up to generally accepted industry standards.

Should any of the above events occur, your E&O insurance policy will kick in, paying for your attorney fees, court costs, and settlements or judgments, up to your policy limit.

And don’t forget. Typical E&O insurance policies include duty-to-defend language. This means the insurance company is on the hook not only for paying your legal fees, but also for providing you with an attorney. Not having to vet and retain your own lawyer is a huge plus when you’re in the middle of a nasty client fight.

E&O Insurance Can Keep Your Business Out of Court

Most people focus on the ability of E&O insurance policies to protect their assets should they lose in court. But an equally powerful benefit is their ability to provide cash to settle client disputes out of court.

With E&O insurance coverage, your insurer will provide you with an attorney to immediately manage communications with the plaintiff and that person’s lawyer. The goal: to reach a mutually agreeable settlement, which will prevent the delays, expense, and headaches of taking a case to court. It also allows a trained legal professional to handle negotiations rather than you, who might be unschooled in legal matters. Having your attorney negotiate for you will help both parties to agree on an optimal settlement amount—not too large, but not too little.

Now, consider what might happen if you didn’t have E&O insurance. The plaintiff might have been willing to accept a lower amount. But since you lacked the money to settle, the dispute might end up in court anyway, costing you more money in the long run—money you didn’t have.

Since E&O insurance can keep your business out of court, doesn’t it make sense to protect your future now with an affordable, comprehensive E&O policy? And if you’re looking to shop, apply, and pay for your E&O insurance in five minutes online, then consider visiting EOforLess.com today to take advantage of our user-friendly shopping portal. It’s easier and faster than buying from a traditional E&O insurance broker. Good luck!

 

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