Errors and omissions (E&O) liability insurance safeguards policyholders from claims arising out of their rendering or failure to render professional services. Also called professional liability insurance or malpractice insurance, E&O insurance protects both a firm and its licensed professionals against claims alleging that their errors, oversights, negligence, missed deadlines, inaccurate advice or underdelivered services caused harm to a third party. However, like all insurance products, E&O policies have several notable exclusions.
Who Needs E&O and Why?
Most general commercial liability (GCL) insurance policies exclude E&O coverage, which is essential for law firms, architecture/engineering firms, financial service firms, real estate brokerages and other providers of professional advisory services. Large healthcare practices often have both medical malpractice insurance, which applies to physicians’ direct treatment of patients, and E&O insurance, which guards against exposures linked to business activities associated with managing patients’ care.
Even the most competent firms and professionals are at risk for lawsuits from unsatisfied clients claiming that they were harmed by the service provider’s actions or inactions. E&O policies help cover legal fees, settlements and judgments against the firm and its professionals. Even when a claim is meritless, defense and investigation costs can quickly mount. But it is important to carefully read your policy to understand what it does and does not cover. Here are some common exclusions.
Dishonest, Intentional, Malicious or Criminal Acts
While E&O policies cover negligent acts, errors and omissions, they generally exclude claims arising out of dishonesty, intentional wrongdoing or criminal acts. For instance, if a company is harmed because its law firm missed an important court deadline, the company may sue the law firm for negligence. This would generally be covered under the law firm’s E&O policy. However, if the law firm intentionally missed the deadline to spite the client, this would fall under the exclusion, and there would be no coverage. Similarly, if a financial service provider’s fraudulent acts harm a client, this claim, too, would be excluded from coverage. However, E&O insurance companies have a duty to defend policyholders until they admit to criminal or intentional wrongful acts or there is a court adjudication against them. (See our previous article for more on an insurer’s duty to defend.)
Bodily Injury and Property Damage
E&O insurance generally excludes events that would be covered under other types of insurance. As such, this insurance product will not protect you from claims of bodily injury or property damage brought by third parties, which would be covered under a GCL policy. For instance, if a client comes to your offices for advice and falls and breaks an ankle or a laptop, you would not have coverage under your E&O policy.
Employment-Related Claims
Similarly, E&O insurance is not the proper vehicle for protection from sexual harassment, workplace discrimination, wrongful termination, workplace injuries or other employment-related claims brought by current, former or prospective employees. These would generally fall under employment practices liability insurance (EPLI) or, in the case of workplace injuries, workers’ compensation insurance.
Cyber Claims
E&O insurance typically excludes losses that result from a data breach or cyber attack. Cyber liability insurance covers these losses, which may include defending claims brought by third parties or the costs of investigating and remediating the breach, informing customers and providing credit monitoring. Cyber coverage can often be purchased as an add-on to an E&O policy. (See our previous article for more on the different types of insurance a business needs.)
Losses from Ancillary Services
E&O coverage applies specifically to claims arising out of professional services. If your firm is involved in additional activities that fall outside the normal scope of services provided by similarly licensed professional firms, you may not have coverage for claims that arise out of these ancillary activities.
Prior Knowledge
The prior knowledge exclusion in E&O policies bars coverage for claims that the policyholder knew about or should have known about before the effectiveness date of the policy. Further, if the policyholder previously knew about any negligent acts, errors or omissions that could potentially give rise to a claim, this may lead to a denial of coverage under the prior knowledge exclusion, as well.
Insurance policies are complex commercial contracts, and it is important to understand your policy in order to ensure that you and your business have the protections you need.
If you are involved in a dispute with your business insurance company, contact us. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.