Why Do I Need Errors and Omission Insurance?

Will placing that candidate put your personal finances at risk? Ninety percent of all recruiters don't have any coverage because they perceive the fees as too high. Below you will find a report by Bob Style, the General Counsel for NAPS, to shed some light on this topic. According to Conrad Taylor, President of NAPS, they offer a plan from CNA for around $1200 for NAPS members.

I talk to recruiters every day who look to me for advice and suggestions on best practices for tracking and placing candidates. I suggest you take the time to look into this before you are caught off guard.


WHY DO I NEED ERRORS AND OMISSION INSURANCE?

Most of you have heard, at some time or another, about the wisdom a purchasing an errors and omissions insurance policy. Judging from the number of staffing firms that do not have such insurance, however, it appears that many of you do not understand the risks you run every day in your business and, more importantly, that one misstep can be so costly as to spell the end of your business. Even winning a “malpractice” case can be prohibitively expensive. Remember, in the United States, each party pays its own legal fees, and in some of the scenarios below, it would not be unusual for these fees to run into six figures.

What are some of the cases which would typically be covered by an E and O policy?

The candidate lies on the resume. Whenever I ask a group of recruiters whether they believe that more than half of their candidates lie on their resumes, invariably almost everyone in the room raises their hands. Yet, almost all recruiters refer the resume, in one form or another, to their clients. Suppose the candidate has lied about work experience, educational background or dates of past employment, and your client states that had it known the truth about the candidate, it would never have hired him or her. So, the client states, you know that the resume most likely is untrue in some respect or another, you are the “expert” in this business, and you never told me that the resume you sent me is more likely than not untrue. Why shouldn’t you compensate me for being defrauded like that? Add to that the fact that the NAPS Code of Ethics states, in effect, that you are responsible for the accuracy of information you pass on about a candidate unless you disclaim such responsibility. (To find sample contract language disclaiming such responsibility, take a look at the NAPS/ASA Model Recruiting Agreement at http://www.recruitinglife.com/.) It is not at all clear that a court would find you liable under the above facts. What is clear is that employers are more aggressive than ever in pursuing recruiters for damages in these cases, and that the cost of legal fees turns even a victory into an expensive defeat.

You fail to disclose a candidate’s criminal record. A common complaint to which an E and O policy would respond is that you failed to disclose a previous embezzlement by your candidate, who then embezzled from your client. In these types of cases, it is not unusual for the amount embezzled, and thereby sought from you by your client, to run into the hundreds of thousands of dollars. I have not seen court cases that discuss whether a recruiter has an obligation to check criminal records, in the absence of a contractual agreement to do so, and you may well win the case, but again at great expense. There is one federal court case which held that a jury could find a recruiter liable to its candidate’s co-worker who was raped by the candidate, after the recruiter failed to accurately disclose certain aspects of the candidate’s prior conviction for rape.

Your actions cause the candidate to lose his or her current job. Most typically, that would happen if you refer the candidate to a company which you do not realize is related to or affiliated with your candidate’s current employer, the word gets back to the employer that the candidate is looking around, and the candidate is fired as a result. I’m sure you’re smart enough not to refer your candidate to his or her current employer, but do you know all of the parents, subsidiaries or affiliates of the current employer? You might also become involved in litigation if you do a reference check on your candidate, and the person with whom you checked informs the current employer that the candidate is looking.

You place the candidate with a company which has a mass layoff or goes out of business. You’re supposed to be the expert here, the candidate will argue. You should have known, or knew and failed to disclose, that the company with whom you placed the candidate was on shaky financial ground. Now the candidate has quit one job and lost another, all because of all the glowing remarks you made about the client and the position in order to convince the candidate to take the job, and in order to earn a fee. Isn’t it understandable why a lawyer would advise the candidate to sue you in such circumstances.

The client reneges on its offer, after the candidate has quit his or her present job. Are you liable in such circumstances? I doubt it, unless you knew the client has a history of doing this. Isn’t this the client’s problem and not yours? I think so. Will you get named as a defendant along with the client, even though you will probably win? Very possibly.

To try to protect yourself against exposure to huge damage suits and expensive legal fees, you should do the following:

1. Review your contract to see if it is providing you with maximum protection
2. Review the various representations you make to candidates and clients to see if you may be making promises for which you don’t wish to be held liable if you can’t deliver. In particular, take a look at your web site. Are all the representations you make there true, or maybe more importantly, can you prove they are true?
3. Most important of all, purchase a good errors and omissions policy which will not only cover damages for situations like those discussed above, but which will also cover attorneys fees.

Call me with feedback!

Tammy
877.309.5222 x 102