Errors and Omissions Insurance. We have all heard the term. Hopefully we all have paid the premium. When I entered the industry in 1997, it was drilled into my head that right next to rent (I had a brick and mortar office) the E&O insurance was the most important bill I had. And for 21 years, I have been paying it—sometimes begrudgingly because I never had to use it. But I was recently talking to a former colleague and catching up and he shared a horribly sobering tale.
Yes, it has to do with E&O insurance and (spoiler alert) it had a bad ending. Let’s call my colleague Jim.
Back in 2015, Jim and his agency were doing well. He was still operating a storefront agency with a single branch with three employees. He was not retiring to Tahiti anytime soon, but was making ends meet. The recession was over. People were spending money and things looked pretty rosy.
The agency had booked a package trip to Mexico with a well-respected supplier. The client embarked on what was to be a fun week away from it all. About halfway through, his client and girlfriend were out on the town drinking and having a good time. On the way back to the resort, the unthinkable happened.
The taxi driver pulled over, demanded the rest of their money at gunpoint and explained that when they got to the hotel, they would retrieve the valuables in the room and give them to him. I am not sure if there was an implicit threat to their lives, but the client felt that had he not complied that he and his girlfriend might have been killed and left along the side of the road. They complied, and after giving their valuables to the cabbie, the cabbie disappeared.
Immediately reporting it, the hotel seemed nonplussed and remarked that they were all-inclusive and had the couple remained on the property, they would have been safe. The police were reluctantly called and the response was similar. The hotel did what they could to accommodate them and help them, but in the end it was not their fault. They flew home immediately and began to process what had happened.
This was a tragic incident and really no one’s fault other than the cab driver. No one ever expects to get robbed. The hotel really cannot be held responsible. Not the restaurant they were partying at. The client was certainly not responsible. Not the travel supplier. And definitely not the agency. Or so you’d think.
The client ended up suing everyone. The hotel, the travel supplier, and the agency. The initial shot was for $25,000 for replacement of stolen goods (why someone takes $25,000 worth of goods on vacation is for a different column), emotional stress, reimbursement for missed work because of the stress, and the cost of the trip that was ruined.
The hotel was dismissed almost immediately. That left the supplier and the agent. After some wrangling, the supplier was dismissed due to the terms and conditions in their contract. And here’s where it gets ugly.
The agency did not pass along the terms and conditions to the client. The court ruled that the client did not have complete information to assure their safety at the time of the sale. They also said that based on State Department warnings, the agency should have advised the client of the dangers of traveling to the city. Now mind you, the city is a major tourist city with relatively low crime and the State Department warning was for incidents a good distance away. Think of a warning for the California because of riots in LA and with travel to Sacramento. The agency never presented the supplier’s terms and conditions (I am guilty of that), and never made an explicit warning about safety nor did they present the State Department warning.
In the end, a jury awarded the client $50,000 all said and done.
But, here’s the kicker, the agency had let the E&O lapse during the recession and never picked it up again. And, like most small agencies, he did not have a spare $50,000 lying around. Nor did he have the $13,000 in legal fees needed to defend a case his lawyer assured him was a “piece of cake.”
Fast forward to a home equity loan to satisfy the judgment and legal fees, a default on the loan, a divorce, a foreclosure of the home, and the repossession of a vehicle. Add in some unfavorable local press, a flurry of negative social media posts and the doors were shuttered within 12 months. Jim was not about to try and rebuild after this and ended up shifting gears completely and took a job (ironically enough) selling insurance as he tries to re-build a life.
Was he responsible? Perhaps to a small degree. Was the judgment fair? Not really. Could it have been avoided? Probably not; but it could have been mitigated by the E&O insurance. With the E&O, the company will try to negotiate a settlement out of court—they are usually very good at that. If it goes to court, they have attorneys that are trained in these types of cases—not the local attorney that set up your LLC. And finally, if they lose as Jim did, they will pay off the judgment. Granted, you may not like the increased premium. They might even drop you entirely depending on the size of the judgment, but you will have protected yourself.
Don’t be Jim. Make sure you have E&O insurance. There are several companies that specialize in it for the travel industry. And many business insurance agents can provide coverage as well. If you have it—kudos to you. If you don’t….now you know what phone call you need to make right now!