I contacted several academics at the Faculty of English Cambridge University (The question was from a Cambridge Advanced English, Use of English test). Several replied, with all of them acknowledging that both answers are correct. With some of them preferring one over the other for idiomatic reasons.
Out of the academics who replied, the email from Prof Drew Milne [wiki] was by far the most verbose:
Both are grammatically correct, but they mean slightly different
things.
Errors of judgment are errors associated with the faculty of
judgement: you could say errors of judgment are mistaken judgments or
mistakes. Usually an error 'of' judgment indicates a deliberately
wrong, often unethical or criminal judgment.
Errors in judgment are errors made in the act of judgment, more like
miscalculations commited in the process of judgment: errors in
judgement are more like relying on a faulty apparatus (not wearing
reading glasses) rather than making bad judgments deliberately.
Mistakes would result from the errors made in judging something, but
it is a different quality of mistake, and in criminal contexts, an
error in judgment would usually suggest a more accidental mistake
rather a deliberate or intentional act, more a case of neglicence than
criminal intent.
Put differently, the 'of' acts a genitive, whereas the 'in' indicates
as a temporal preposition.
best wishes,
DM
After inquiring further with the specific context and asking whether "errors in judgment" is the preferred answer, He replied,
Yes perhaps, but either would do, neither is more "correct" than the
other, not least because the differentiation is a rather legalistic
clarification and the context offered suggests both errors of judgment
and errors in judgment, and I think errors of judgment would be more
idiomatic, perhaps even the more common form. English doesn't really
allow too fine a line of correctness to be established. if you offer
a native speaker the alternatives, I think they would differentiate as
I suggested, but I don't think the context you provide forces either
to be the right one.