Who Needs Errors and Omissions Liability Coverage?
Most E&O Policies Are Claims-Made
Errors and omissions (E&O) insurance is a type of commercial liability coverage. It protects your business against claims arising from your negligent acts or your failure to provide the level of advice or service the plaintiff expected. E&O coverage is also called professional liability insurance.
Business professionals like architects, physicians, and computer consultants hold themselves out as experts in their field. These individuals are expected to meet the standards of care that prevail in their industry. In many industries, professionals are expected to act as a reasonable person would behave in a similar situation with equivalent education and experience.
Virtually any business that performs a service or provides advice in exchange for a fee may have a professional liability exposure. Here is an example.
Sample E&O Scenario
Melissa owns a yoga studio called Mellow Moves. Melissa has insured her business for liability under a standard ISO commercial general liability (CGL) policy. She hasn't purchased errors and omissions liability coverage because she doesn't think she needs it.
One day, Melissa is shocked to receive a letter from an attorney notifying her of a lawsuit against her business. The plaintiff is a former yoga student named Helen. Helen claims she was severely injured six months ago while doing a pose in one of Melissa's yoga classes. She was doing the pose the way Melissa had taught her. Unfortunately, Melissa's technique was faulty. Her improper instruction caused Helen to suffer a spinal injury that requires surgery. Helen is demanding $35,000 in compensation.
Helen’s suit will not be covered under Mellow Moves' CGL policy. Helen claims that her injury arose from Melissa's negligent instruction. She is not seeking damages for an injury caused by a slip and fall or a similar accident that occurred on the studio's premises. Instead, her suit is based on allegations that Melissa failed to provide the level of instruction Helen expected.
Because Melissa has no E&O coverage, she will be stuck paying the damages out of pocket. She will also have to pay the cost of hiring an attorney.
Types of E&O Policies
Many E&O policies are designed for specific types of professionals. For example, medical malpractice policies are intended for physicians while architects and engineers E&O policies are devised for design professionals. If an industry-specific form isn't available, an insurer may provide E&O coverage using a miscellaneous professional liability policy. This non-specific E&O policy form is often used to insure "non-traditional" professionals like consultants, travel agents, and construction managers.
While E&O coverage policies vary from one type to another and one insurer to another, they have many features in common.
Most errors and omissions policies are claims-made. This means they cover claims made against insured parties during the term of the policy.
Some policies limit coverage to claims made and reported during the policy period. These policies cover claims only if they are made against an insured and reported to the insurer during the term of the policy.
Some E&O policies include a retroactive date. If such a date is applicable, your policy will limit coverage to claims resulting from acts, errors or omissions committed on or after the date specified. Claims resulting from errors or omissions committed before the retroactive date aren't covered. The retroactive date should be the date your first claims-made E&O policy began. It should remain the same each time your policy is renewed.
The insuring agreement in your policy summarizes your coverage in broad terms. It explains what the insurer promises to do in exchange for the premium. Here's a typical E&O insuring agreement:
"We will pay on behalf of the insured loss that the insured becomes legally obligated to pay for any claim first made during the policy period that arises out of a wrongful act."
This means the insurer will pay damages or a settlement you are required to pay because of a claim based on a wrongful act. Pay on behalf means your insurer will pay these costs upfront rather than reimbursing you.
The term wrongful act usually means a negligent act, error or omission that you allegedly commit while performing or failing to perform professional services. Professional services may be defined in the definitions. Alternatively, the services covered by the policy may be described in the declarations. An example is "software consulting services." The description is important because it determines the types of activities that are covered by your policy.
If "covered services" are listed in the declarations, be sure the description accurately reflects the services your business provides.
An important element in an E&O policy is defense coverage. The policy should state that the insurer will defend you against covered claims. The cost of defending claims may be covered inside or outside the policy limit. Because defense costs can be substantial, it's best to buy a policy that covers these costs in addition to the limit.
Here are some exclusions commonly found in E&O policies. This is not a complete list.
- Punitive damages
- Dishonest, fraudulent or criminal acts committed by you or another insured
- Wrongful acts you were aware of before the policy inception date
- Wrongful acts or claims you reported under a previous policy
- Bodily injury or property damage
- Liability assumed under a contract
- Fee disputes
- Profits you have gained illegally
- Failure to maintain insurance
- Discrimination based on race, sex, color, creed, etc.
Limits and Retention
Many E&O policies contain an individual limit and an aggregate limit. The individual limit may apply to each claim or to each wrongful act. It represents the most the insurer will pay for damages or settlements arising out of a single claim or wrongful act. The aggregate limit is the most the insurer will pay for all damages or settlements arising out of all claims made during the policy period. If defense costs are subject to the limits, the individual and aggregate limits will include defense costs as well.
Some E&O policies include a retention. The retention is the amount you must pay out of pocket for each claim. Depending on the policy, the retention may apply to damages only or to damages and claims expenses.