When a business or professional’s services unintentionally lead to a third party’s financial loss, Errors & Omissions (E&O) Insurance can provide important coverage to help limit the impact. To learn more about this type of insurance and why it is important for businesses and professionals, we spoke with Steele Hutto, Senior Broker, Professional Liability, Burns & Wilcox Brokerage.
Who should have Errors & Omissions Insurance?
S.H.: Any business or professional that provides a professional service to others (also called third parties, customers, or clients) for a fee or other form of compensation should have E&O Insurance. There are hundreds, if not thousands, of classes of E&O risks, including traditional professions like lawyers, health care providers, investment advisors, insurance agents and miscellaneous consultants, as well as architects and engineers, contractors and safety consultants, among many others.
What are the greatest risks for these professionals?
S.H.: The risks depend on the class of business. If a customer suffers a financial loss as a result of an error or omission, E&O Insurance is designed to cover it, subject to the terms and conditions of the policy. Claims covered by an E&O Insurance policy can include damages caused by things you did and/or things that you should have done. For example, if an insurance agent fails to bind coverage that was requested by their client, and the client subsequently has a claim that would have been covered if coverage had been bound, the insurance agent’s E&O coverage would respond. Financial loss is typically the key driver for E&O Insurance.
What should they be aware of relative to these risks?
S.H.: Professionals should be aware of the exposures that exist within the services that they provide to their customers. There are various potential claims scenarios, so it is difficult to foresee what types of claims could occur. To understand potential exposures to risk, all professionals should be aware of how and where their professional advice or service will be used. Lawsuits without merit are filed often, and E&O Insurance policies are typically duty-to-defend policies, which means that they will provide defense for the insured until the final judgment or settlement is determined.
What are some of the covered expenses of E&O Insurance?
S.H.: The policies will typically define “loss” and “claims expenses” as covered expenses. “Loss” is intended to cover settlements or judgments against the insured for compensatory damages. They can also cover punitive damages, which are damages assessed in the legal process to punish a defendant for negligence, where they are insurable. Non-monetary or injunctive relief is typically not covered; however, sometimes agents can negotiate a carveback (which essentially carves affirmative coverage back from an exclusion in an insurance policy) for coverage or a sublimit for defense costs/claims expenses in certain cases.
“Claim expenses” are reasonable and necessary costs and expenses incurred by the insured to adjust, investigate or defend a claim. They are also referred to as “defense costs.” They can also include premiums on appeal bonds and post-judgment interest on covered “loss.” Claims expenses are usually inside the limit for most E&O policies but sometimes there are options to add claims expenses outside the limit. It is important to understand the adequacy of limits, as defense costs can quickly dilute the limits available for judgments, settlements or indemnity payments down the road.
What steps should professionals take to complement their E&O Insurance coverage from a prevention standpoint?
S.H.: The majority of carriers offer some risk management and prevention services to policyholders. My advice is for professionals to review their policies and find out which services are available to the policyholder. For architects and engineers, assistance with contract review is very important and common. Some carriers have hotlines and the ability to consult with attorneys. Background checks, employee training and job site training are also potential services offered by insurance companies with robust E&O Insurance programs.
What advice would you give brokers to increase their success rates with E&O Insurance?
S.H.: My advice is to become an expert in E&O Insurance or call a broker who is an expert. Read the coverage forms thoroughly and dissect the policy language. Understand each of your carrier partners’ appetites and ask for any and all available enhancements, including the ability to manuscript when available. Differentiate yourself. E&O policies are not “off-the-shelf” named-peril ISO forms; the majority are highly sophisticated all-risk forms and each carrier has a different form. It is important to understand and help craft the professional services definition to ensure that it encompasses all the client’s services and attempt to remove or improve any problematic exclusions.
Why your clients might need it: If your client provides a professional service to customers or clients for a fee or other form of compensation.
Protects against: If a customer suffers a financial loss. Claims covered by an E&O Insurance policy can include damages caused by things you did and/or things that you should have done.
Expert opinion: “Brokers need to understand and help craft the professional services definition to ensure that it encompasses all of the client’s services and attempt to remove any problematic exclusions.”