E&O is important for anything outside of the living room. I'll give an example of my own film because I know the business of it best.
I'm part of a group called the "Movie Mavericks" here in LA, and we're connected to the Cinema Libre studio. (For all you SoCal guys you should check them out. Wonderful, wonderful people to work with and an excellent post shop.) The concept of the group is that we help each other make our films, so there's a lot of spec work that flows back and forth.
My film is being made on a tiny budget, under a SAG limited exposition waiver, with star talent on deferred salary and the whole executive team trading work for an investment stake. It's a complicated financial setup. The film itself is a genre satire that borrows on classics of the genre for both commedy and commentary. So there are two major issues: flow of money and intellectual property.
As filmmakers, we're supposed to be very careful to keep everything above-the-board. Any time we screw up, we're open to a lawsuit, and E&O covers against those lawsuits.
In addition, in the real world, we do all kinds of things that open us up to potential liability. Most filmmakers are better at making movies than they are at making contracts, so there's always the potential for someone to be (or feel) taken advantage of. We go out and steal a lot of shots, and it's always possible that when we accidentally film a brutal murder scene in front of some company's billboard, they won't appreciate the brand exposition. And so on.
Given the escalation in litigation over the past few years, it's increasingly important to maintain adequate protection. In addition, most distributors require E&O to be in place before the picture goes out the door. Given how difficult it is to distribute a film at the best of times, it's always best to approach distribution with all the ducks in a row.
There are two ways of thinking. One is that it's always best, if you can afford it, to be as well covered as possible. The other is that it's better to be careful. I think (personal, nonprofessional opinion) that it's best to decide where you want your project to go and build the infrastructure for it. If you want it to be seen broadly, then do it all by the book. If you want to show at a couple festivals and on a couple local cable broadcasts, then why waste the money?
Some info anyway...