Breach of Contract and E&O: How Professional Liability Insurance (Errors & Omissions) Responds

When a client alleges you failed to deliver contractual promises, the resulting claim can mix breach-of-contract law with professional negligence. For professionals and service firms across the United States—whether a marketing consultant in New York City, an IT contractor in Los Angeles, or a financial advisor in Chicago—understanding how Professional Liability (Errors & Omissions, or E&O) responds to breach-of-contract claims is essential to managing risk and protecting your balance sheet.

This article explains how E&O policies typically handle breach-of-contract allegations, important limitations and endorsements, real-world pricing examples, and practical steps you should take if you face a contract-related claim.

How breach of contract differs from negligence (and why it matters to E&O)

• Breach of contract: A claim that you failed to perform duties promised under a written or verbal agreement. Remedies are usually monetary damages or specific performance.
• Negligence / professional error: A claim that you did not meet the standard of care for your profession, causing client loss.

Why it matters: E&O policies are designed primarily to cover alleged professional errors, omissions, or negligent acts, not pure breach-of-contract claims. However, many claims mix both causes of action. How an insurer responds depends on policy language, state law, and whether the claim is framed as negligence or purely contractual.

Typical E&O responses to breach-of-contract allegations

• If a claim alleges both negligence and breach of contract, many E&O insurers will defend and potentially indemnify the negligence portion, and sometimes cover contractual liability depending on the policy.
• If the claim is purely breach of contract (no alleged professional error), many policies will exclude coverage.
• Defense costs: Some policies will pay defense costs for mixed claims; others exclude defense for pure contract claims or allocate defense costs between covered and uncovered allegations.

See more on how insurers allocate legal expenses in Defense Costs and Professional Liability Insurance (Errors & Omissions): Who Pays What?.

Common policy clauses that determine coverage

• Claim-made and reported: Most E&O policies are claim-made—coverage applies only to claims first made during the policy period (or an extended reporting period) and subject to the retroactive date.
• Contractual liability exclusion: Many policies exclude liability assumed under contract unless liability would have existed absent the contract; however, some policies offer an endorsement to provide limited contractual liability coverage.
• Allocation and duty to defend: Policies differ on whether defense costs are inside the limit (reducing the available limit) or outside the limit (paid in addition). This affects how much remains to indemnify damages.
• Prior acts / retroactive date: If the alleged breach occurred before the retroactive date, most policies will deny coverage.

For an in-depth breakdown of what's commonly covered, read Breakdown of Coverages Inside Professional Liability Insurance (Errors & Omissions): What to Expect.

Typical exclusions and red flags

• Pure breach-of-contract claims without negligence allegations.
• Fraud, criminal acts, intentional wrongdoing.
• Contractual fines, liquidated damages specifically excluded.
• Wage/hour or employment-related claims (often handled by Employment Practices Liability Insurance).

Review your policy language carefully and consider endorsements if you frequently contractually assume liability.

Real-world pricing (U.S. focused) — examples and averages

E&O pricing varies by profession, revenue, claims history, and location. Below are typical ranges and company examples for small- and mid-size professional firms in major U.S. metro areas (New York City, Los Angeles, Chicago, Houston, Miami).

Sources:

• Hiscox: https://www.hiscox.com/small-business-insurance/errors-omissions-insurance
• The Hartford: https://www.thehartford.com/errors-omissions-insurance
• Insureon cost guide: https://www.insureon.com/errors-omissions-insurance/cost

Examples by location:

• New York City (higher litigation exposure): expect premiums 10–25% higher than national averages for comparable firms.
• Los Angeles & San Francisco (tech/creative risk): higher for IT consultants and app developers due to higher potential damages.
• Houston, Dallas, Miami (competitive pricing): generally closer to national averages, but industry specialization can raise costs.

Large firms or firms handling higher exposure (e.g., financial advisors, architects) often pay thousands to tens of thousands per year. Carriers such as Chubb and CNA commonly underwrite larger professional liability accounts with tailored pricing.

Coverage extensions and endorsements to consider

• Contractual liability buyback (or contractual liability endorsement) — useful when your contracts require you to assume certain liabilities.
• Claims-made prior acts (retroactive date) extensions — covers earlier work if added when buying a new policy.
• Limits increase — for contracts requiring higher limits (e.g., $2M/$4M).
• Cyber liability add-on — for claims stemming from data breaches tied to alleged professional errors.

Explore relevant add-ons in Endorsements and Add-Ons: Expanding Professional Liability Insurance (Errors & Omissions) Coverage.

Typical claim scenarios — how E&O reacts

• Scenario A: A marketing firm in Los Angeles fails to deliver promised campaign results; client sues for breach-of-contract and negligent strategy. Outcome: E&O likely defends the negligence claim and may negotiate settlement; pure contractual damages may be excluded or allocated.
• Scenario B: An IT consultant in Chicago misses a deliverable causing client downtime; client sues for losses and points to contract terms. Outcome: If complaint asserts both negligence and breach, E&O usually participates; consider contractual liability endorsement for clearer protection.
• Scenario C: A consultant signs a hold-harmless clause assuming third-party liabilities. Outcome: Many policies will exclude liabilities assumed by contract; specific endorsements may be needed.

See more claims examples in Claims Scenarios: What Professional Liability Insurance (Errors & Omissions) Typically Covers — and What It Doesn’t.

Steps to take immediately after a breach-related allegation

1. Notify your insurer promptly (most policies require immediate notice of potential claims).
2. Preserve documents and communications related to the contract and performance.
3. Engage counsel experienced in E&O and professional defense—many insurers have panel counsel.
4. Review the contract for indemnities and limitation of liability clauses—these shape exposure.
5. Consider a reservation of rights discussion with insurer to understand coverage position and defense obligations.

Final considerations: placement and limits by state

• In high-litigation states like New York and California, consider higher limits and defense-side coverage features.
• Review insurer reputation and claims-handling—carriers such as Hiscox, The Hartford, Chubb, and CNA are active in the U.S. E&O market and provide a range of products across metro areas.
• Obtain tailored quotes—from marketplaces like Insureon or direct carriers—to compare cost vs. coverage for your specific profession and city.

For guidance on whether E&O covers third-party claims tied to contracts, read Does Professional Liability Insurance (Errors & Omissions) Cover Third-Party Claims? A Deep Dive.

Protecting your firm means reading policy language closely, negotiating contract terms to limit assumed liability, and buying appropriate limits and endorsements for your location and industry. If you have a current policy, request a coverage review focused on contractual liability, allocation of defense costs, and retroactive dates to ensure you’re covered where it matters most.