Sunday, April 25, 2010

A Quick & Dirty E&O Sketch

Errors & Omissions Insurance is a large nebulous title. It’s not one of those policies that rings with concrete meaning like Auto, Homeowners, and the ubiquitous Life Insurance. Errors & Omissions policies essentially promise to pay damages due to “wrongful acts” that are not excluded in the policy. Nice and concrete, don’t you think?

Coverage is not stated.  Rather, it is implied by the language outlining what is not covered.

Have you ever tried to read one of these things? It takes me a while, and I’m in the business!  I’ve read my share, and so I feel that I can provide a sketch for the major points common to most E&O policies:


INSURING AGREEMENT – Part 1: Wrongful Act

This is where the carrier tells you that they will pay damages because of a claim resulting from your wrongful act. Damages, Claim and Wrongful Act are all defined later in the policy. These words have “ ” to indicate that the policy tells you what they mean – not the dictionary.

The Insuring Agreement also dictates a time period when the claim or act must have occurred in order to trigger coverage.

Most E&O policies are CLAIMS-MADE. Claims of this type usually have a long tail on them. For example, you work on a client’s network in January 2008, but the claim doesn’t occur until January 2010. In this example, the policy in effect in January 2010 will be the policy that responds. Coverage dates are very important dates with regard to Claims-Made policies.

Important Dates on your E&O policies:
Retroactive Date:  This is the beginning of time as far as your policy is concerned. Any acts that occur after this date are covered. Any acts that occurred before this date will not count.
Policy Period: Every policy has effective dates of coverage, usually 1 year.


Extended Reporting Period:  If coverage lapses, the policy provides an extended period of time in which to report claims resulting from acts during the coverage period. E&O policies usually have a built-in ERP or Tail for 90 days. Policyholders have the option to purchase extended Tails spanning multiple years. The company will charge a premium, which must be paid upfront.
To be covered, Acts must occur after the Retroactive Date. Claims must be reported during the Policy Period or ERP. Insureds cannot have knowledge of any pending claims prior to the Inception Date of the policy.


INSURING AGREEMENT – Part 2: Defense

Your insurer also spells out the conditions under which they will pay for your defense. The policy states that they have the “right and duty to defend” even if the claims brought against you are “false and groundless.” They may either appoint counsel for you or approve the counsel you request.

Defense coverage ends when the limit of liability is exhausted (worn out, depleted, kaput).

Be sure to know how whether your policy covers defense costs INSIDE or OUTSIDE the Liability limit. Outside the limit is preferable. If the policy only provides Defense INSIDE the limit, then make sure that your coverage limit is high enough to protect against potential defense costs plus damages. $500,000 in defense will leave only $500,000 left to pay damages on a policy with a $1,000,000 limit.


EXCLUSIONS


Cue the Darth Vader music. This is where the rubber hits the road. Insurance companies hestiate to tell you what is covered, but they will emphatically tell you what ISN’T covered. Be sure to read your Exclusions. Here are some biggies:

I.  Exposures covered elsewhere


The insurance industry has a policy for everything. When an act is excluded, that means that it can probably be ensured either by purchasing an endorsement or through a separate policy.

  • Bodily Injury, Property Damage, Personal & Advertising Injury – covered under a Commercial General Liability policy.
  • Discrimination, Humiliation, Harassment – can covered under an Employment Practices Liability policy (for employees), General Liability (for 3rd parties), or Directors & Officers
  • Pollution – can be covered under a Pollution Liability policy.
II.  Standard Stuff

Fraudulent Acts – if this insurance existed, it would sell itself.

Contractual Liability – this is a large and complicated topic. Too big for the scope of this post. Maybe we can get into this later. Insurance companies generally do not insure situations where you are held liable simply because you agreed to be so in a contract. There has to be some negligence or breach of duty on your part to trigger coverage.

Nuclear – tough to find this coverage anywhere.

Wear & Tear – can’t be found on any policy. Insurance is for sudden and accidental events. If loss comes from equipment that is not properly maintained, then the insurance company may exclude it.

III.  Hot topics.

The following exclusions are built into most E&O policies. Coverage for these exposures can usually be added by endorsement for additional premium.

Patent/Copyright infringement – Claims alleging that you violated someone else’s intellectual property are not covered. If these claims are prevalent in your profession, be sure to add this back. I recommend that all of my Technology clients have this coverage.

Unauthorized Access – This term can have more than one meaning in an E&O policy. Expect to see quotation marks around it. Unauthorized Access can refer to access to your system as well as access to your client’s system. The access is perpetrated by a 3rd party without permission. What type of damages will a client demand if they pay you to secure their network, and it gets hacked because of something you failed to do?  See my prior post, Access Unauthorized?  Claim DENIED!  If in doubt, add this coverage by endorsement.

Personal & Advertising Injury - These exposures are normally included in a standard CGL policy.  However, professions who need E&O coverage usually find this exposure excluded from their CGL and standard E&O policies.  "Personal & Injury" includes claims alleging false arrest, malicious prosecution, wrongful eviction, libel and slander.  It is best to add this coverage back to your E&O policy by endorsement.



If you've made it this far, you probably understand that "quick" is a relative term.  As policy summaries go, I'm flying at breakneck pace.  I've covered many important points here, but there are a few more sections that require examination.  I will hit those sections in future posts.

In the meantime, if you have any questions, please post any questions (or corrections) you might have.

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