Do I Need Errors and Omissions Insurance? Insurance needs vary from business to business. Before you plunk down your cash, make sure you have to.

Q: I want to start a smallhomebased business to supplement my retirement income. I am findingthe cost of errors and omissions (E&O) insurance is prohibitivefor homebased businesses (we got one quote of $2,000), but veryreasonable for larger, conventional businesses. Why can't Ifind E&O coverage at a reasonable rate?

A: Before you start shoppingfor E&O insurance, answer this question: How real is your needfor E&O insurance? Does the type of work you plan to do entailmuch potential for liability? If technology is involved-like beingresponsible for multimedia arrangements at sales presentations-thenwe would say yes. But some types of businesses allow you instead tocreate a client agreement that protects you, making the clientassume the risk. I would not do this without having an attorneyinvolved who can help you determine whether such a clause wouldscare away clients. If, on the other hand, contracts in yourindustry require E&O coverage, provide a warranty or guarantee,or have clauses that require you to indemnify or hold harmless yourclients, you need to start shopping.

The cost of errors and omissions, also known as professionalliability or malpractice, insurance, depends on a number offactors:

• The inherent risk of the kind of work you do. For example, anIT professional is more likely to cause a client a larger monetaryloss than a training specialist.
• The rating category your work is placed in. We have identifiedmore than 1,500 self-employment careers-not counting uniquebusinesses and services-a far cry from the fewer than 200categories described on the Web site of Professional LiabilityInsurance Services Inc., a firm that specializes in this kindof insurance. So you may be lumped into a category that'sconsidered high-risk even if the category isn't relevant toyour specific type of business.
• The number of claims filed in your industry. Your type ofbusiness may not, even in this litigious era, have had a lot ofclaims filed, so the insurance company doesn't have claimsexperience-thus it allows for a huge fudge factor. (This seems tobe 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 insurancefor costs in the hundreds. Often, trade and professionalassociations offer the best buys in E&O insurance, so look intojoining those first. You can also contact agents and specializedWeb sites like the one mentioned above for quotes.

Paul and Sarah Edwards' most recent book is Changing Directions Without Losing Your Way.Send them your start-up business questions at www.workingfromhome.com orthrough us at BIZ Experiences.