ARTICLE
12 January 2024
Errors and omissions (E&O) liability insurance safeguards policyholders from claims arising out of their rendering or failure to render professional services.
United States Insurance
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Errors and omissions (E&O) liability insurance safeguardspolicyholders from claims arising out of their rendering or failureto render professional services. Also called professional liabilityinsurance or malpractice insurance, E&O insurance protects botha firm and its licensed professionals against claims alleging thattheir errors, oversights, negligence, missed deadlines, inaccurateadvice or underdelivered services caused harm to a third party.However, like all insurance products, E&O policies have severalnotable exclusions.
Who Needs E&O and Why?
Most general commercial liability (GCL) insurance policiesexclude E&O coverage, which is essential for law firms,architecture/engineering firms, financial service firms, realestate brokerages and other providers of professional advisoryservices. Large healthcare practices often have both medicalmalpractice insurance, which applies to physicians' directtreatment of patients, and E&O insurance, which guards againstexposures linked to business activities associated with managingpatients' care.
Even the most competent firms and professionals are at risk forlawsuits from unsatisfied clients claiming that they were harmed bythe service provider's actions or inactions. E&O policieshelp cover legal fees, settlements and judgments against the firmand its professionals. Even when a claim is meritless, defense andinvestigation costs can quickly mount. But it is important tocarefully read your policy to understand what it does and does notcover. Here are some common exclusions.
Dishonest, Intentional, Malicious or Criminal Acts
While E&O policies cover negligent acts, errors andomissions, they generally exclude claims arising out of dishonesty,intentional wrongdoing or criminal acts. For instance, if a companyis harmed because its law firm missed an important court deadline,the company may sue the law firm for negligence. This wouldgenerally be covered under the law firm's E&O policy.However, if the law firm intentionally missed the deadline to spitethe client, this would fall under the exclusion, and there would beno coverage. Similarly, if a financial service provider'sfraudulent acts harm a client, this claim, too, would be excludedfrom coverage. However, E&O insurance companies have a duty todefend policyholders until they admit to criminal or intentionalwrongful acts or there is a court adjudication against them. (Seeour previous article for more on an insurer'sduty to defend.)
Bodily Injury and Property Damage
E&O insurance generally excludes events that would becovered under other types of insurance. As such, this insuranceproduct will not protect you from claims of bodily injury orproperty damage brought by third parties, which would be coveredunder a GCL policy. For instance, if a client comes to your officesfor advice and falls and breaks an ankle or a laptop, you would nothave coverage under your E&O policy.
Employment-Related Claims
Similarly, E&O insurance is not the proper vehicle forprotection from sexual harassment, workplace discrimination,wrongful termination, workplace injuries or otheremployment-related claims brought by current, former or prospectiveemployees. These would generally fall under employment practicesliability insurance (EPLI) or, in the case of workplace injuries,workers' compensation insurance.
Cyber Claims
E&O insurance typically excludes losses that result from adata breach or cyber attack. Cyber liability insurance covers theselosses, which may include defending claims brought by third partiesor the costs of investigating and remediating the breach, informingcustomers and providing credit monitoring. Cyber coverage can oftenbe purchased as an add-on to an E&O policy. (See our previous article for more on the differenttypes of insurance a business needs.)
Losses from Ancillary Services
E&O coverage applies specifically to claims arising out ofprofessional services. If your firm is involved in additionalactivities that fall outside the normal scope of services providedby similarly licensed professional firms, you may not have coveragefor claims that arise out of these ancillary activities.
Prior Knowledge
The prior knowledge exclusion in E&O policies bars coveragefor claims that the policyholder knew about or should have knownabout before the effectiveness date of the policy. Further, if thepolicyholder previously knew about any negligent acts, errors oromissions that could potentially give rise to a claim, this maylead to a denial of coverage under the prior knowledge exclusion,as well.
Insurance policies are complex commercial contracts, and it isimportant to understand your policy in order to ensure that you andyour business have the protections you need.
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
