For businesses that provide professional services, an errors and omissions (E&O) insurance policy can be critical to an effective risk management program. Also known as professional liability insurance, E&O insurance protects against claims arising from mistakes, negligence, omissions, inaccurate advice and other alleged failures in providing professional services. But determining whether a particular claim falls within the scope of professional services is not always straightforward. Courts have developed several principles for determining what constitutes a professional service, but the analysis is often nuanced and can vary based on the jurisdiction and the policy language.
Commercial General Liability (CGL) Insurance and the Professional Services Exclusion
Many businesses have a commercial general liability (CGL) policy, which provides broad coverage for claims brought by third parties alleging bodily injury, property damage and, in many cases, personal or advertising injury. But CGL policies typically exclude liability arising from the rendering of, or failure to render, professional services. Because of this, professional service providers also generally need to take out an E&O policy to guard against claims alleging that a professional’s error, omission, negligence, missed deadline, inaccurate advice or other failure caused harm to a client or third party. Together, a CGL policy and an E&O policy protect professional service providers from a broad range of risks. However, when a claim involves conduct that could arguably be characterized as either professional or ordinary business activity, it may reveal a coverage gap between the insured’s CGL and E&O policies.
Courts Often Look at the Conduct, Not the Job Title
One of the most frequently cited definitions of a professional service comes from the Nebraska Supreme Court’s decision in Marx v. Hartford Accident & Indemnity Co.: “Something more than an act flowing from mere employment or vocation is essential. The act or service must be such as exacts the use or application of special learning or attainments of some kind. The term ‘professional’ in the context used in the policy provision means something more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for production or sale of commodities. A ‘professional’ act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual… In determining whether a particular act is of a professional nature or a ‘professional service,’ we must look not to the title or character of the party performing the act, but to the act itself.1
A lawyer, accountant, architect or other professional does not necessarily perform a “professional service” every time that person does something in the course of operating a business. Conversely, an activity does not necessarily fall outside a professional services exclusion simply because it appears routine or administrative. The question is often whether the conduct at issue required the exercise of the specialized knowledge or judgment associated with the insured’s profession.
When examining whether an activity constitutes a professional service, courts will examine the nature of the conduct, the specialized knowledge involved, the relationship between the conduct and the insured’s profession, and the particular language of the insurance policy.
How professional services are interpreted depends in part on the jurisdiction. Some courts have interpreted professional services exclusions broadly, holding that even relatively mundane or unskilled tasks may fall within the exclusion when they are integral to the insured’s professional operations. Other courts have taken a narrower approach, requiring a closer connection between the challenged conduct and the specialized knowledge or skill of the profession.
Insurance Policy Definitions
Just as different jurisdictions interpret professional services inconsistently, the definition of professional services can vary from policy to policy. When a claim falls into a gray area between professional and nonprofessional conduct, it could potentially expose a gap in coverage across the two policies. For instance, say a real estate brokerage is sued by a customer claiming that the customer’s property suffered water damage from a significant storm because a broker failed to properly close the windows. The brokerage may put in a claim with its CGL insurer, arguing that securing the property was merely an ordinary business task, rather than a professional real estate service. The CGL insurer, however, might argue that the conduct was sufficiently connected to the brokerage’s professional activities to fall within the professional services exclusion. The insured may then look to its E&O policy for coverage. But E&O policies contain their own definitions, conditions and exclusions, and the E&O insurer may argue that the activity falls outside the policy’s professional services definition.
The Takeaway
Businesses that provide professional services should carefully review their CGL and E&O policies with an insurance professional to understand if there are any gaps in coverage. This is especially important for businesses whose services have evolved over time. By periodically reviewing your insurance products, you can identify and shore up potentially costly gaps in coverage before they become a problem.
If your business insurance company has denied or is challenging your claim, contact Schwartz Conroy & Hack, PC. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.
1 Nebraska Supreme Court in Marx v. Hartford Accident & Indemnity Co., 183 Neb. 12, 157 N.W.2d 870 (1968)