October 19th, 2020
Imagine this: You are a managed IT services firm that handles computer networking, software, telephony, cybersecurity, and various other outsourced IT services for small- to medium-sized organizations.
You discover that one of your clients – a law firm – has experienced a cyber breach that compromises the confidential records of all their clients spanning almost a decade. Forensic experts determine that the hacker infiltrated their computer system despite the firewall your employees set up.
The law firm may endure significant reputational harm and liability arising from the leaking of its clients’ data. In addition, they face employment liability due to the loss of employee information, as well as costs to hire experts and replace the computer system.
The problem is that general liability insurance only covers property damage and bodily injury. But in this scenario, there was neither property damage nor bodily injury.
The law firm is hardly alone. Many industries face the risk of their advice harming a client financially.
Errors and omissions insurance (E&O; it’s also called professional liability insurance or professional indemnity insurance) addresses coverage gaps found on commercial general liability policies. These gaps often occur when professional services harm a client but do not cause bodily injury or property damage.
Each industry has significantly different professional risks, so it is not surprising that E&O insurance policies are highly customized. Even those operating in the same industry will see vast differences between insurance carriers. It is important to know how to read the policy, know what most E&O policies cover, and learn about what goes into a quality E&O policy.
Unlike a commercial general liability (CGL) policy, E&O insurance doesn't encompass all of your business activities. It targets the exposures that you disclose to the underwriter and is tailor-made to cover those risks.
Here is where you should look to figure out what is covered on your E&O policy or quote.
The first area you should look at when discovering what an E&O insurance policy covers is the insuring agreement. This is an overarching statement that determines what is covered under the policy, and it’s usually one of the first sentences.
Here is an example insuring agreement:
The Insurer will pay Damages and Claims Expenses by reason of a Claim first made against an Insured during the Policy Period for a Professional Incident, which first occurs on or after the Retroactive Date and prior to the end of the Policy Period.
You will notice that some words are in bold and the statement is kind of ambiguous. Those bolded words are terms that are defined in the definitions section of the insurance policy. This helps provide clarification as to what the insuring agreement actually says. For this example, you would look up the definition of "Professional Incident" to know what events are covered. These definitions are found in your insurance policy or quote.
Here is the policy definition of a professional incident in this particular policy:
Professional Incident means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty, including Personal Injury, actually or allegedly committed or attempted solely in the rendering of or failure to render Professional Services.
There you go! This insuring agreement and its relevant definition are the foundation for what is covered under the E&O policy.
In the definition of "Professional Incident" above, we see a failure to render "Professional Services."
What is a professional service, though? Since it is a term that appears in a bold font, we can return to the definitions and see what the policy defines professional services as.
"Professional Services means those services specified in the Declarations."
As we mentioned at the beginning of this insight, E&O only covers the exposures you told the underwriter that you want covered.
You have to look at the declarations page of your policy or quote and make sure that the description of your services truly encompasses all that you do. This will generally be listed somewhere near the limits of insurance on the declarations page (the page with pricing and limits).
For example, if you are a real estate agent and you handle property management for your investor clients, you need the policy to include both sales and property management.
Now that you know what events are covered, here are the typical events that would trigger coverage under the professional liability insurance policy.
If you receive a written or a non-written demand demanding something of you as a result of a professional incident – it doesn’t have to be monetary – you need to contact your insurance company immediately.
They will help guide you through the process of responding to the demand and hiring a legal team to assist you in the resolution.
Any civil or administrative action taken against you as a result of a professional incident is a reason to contact your insurance company immediately. We recommend not waiting before contacting your E&O insurance carrier; if you make a mistake and don’t notify your insurance company, you’re putting them in an even worse position. If this happens, they can deny the claim.
Investigations can be time-consuming and nerve-racking. E&O insurance will also assist you through the investigations process and subpoenas that you might have to comply with as a result of a professional incident.
The E&O insurance policy is designed to protect your business from honest mistakes that can arise out of regular business activity. It is not meant to cover fraud or professional incidents that you intentionally cause.
As with most insurance policies, an E&O insurance policy does not cover events you knew of prior to taking out the policy.
The insurance company will almost always make you sign a warranty on the application that states that you are not aware of any circumstance that could lead to a claim.
The errors and omissions insurance policy does not cover bodily injury or property damage. As mentioned above, you generally obtain this policy to cover the gaps included in the general liability insurance policy, which already covers bodily injury and property damage.
The E&O insurance policy does not cover if you bid a project too low and try to back out of the deal, resulting in a lawsuit or penalty. This is a business risk that you take; for the most part, it is uninsurable.
The most obvious type of company that needs errors and omissions insurance is the one that provides professional advice and services. Almost every lawyer, accountant, insurance agent, and real estate agent has professional liability insurance. This is because it is the primary risk in their business.
For instance, where a contractor would have a significant risk of someone getting physically injured from faulty work (a general liability claim), a lawyer has very little exposure to physically harming someone.
What they do have is a large exposure to their advice harming a client financially (an E&O insurance claim). An example would be mishandling a court proceeding, resulting in a large fine.
Architects and engineering firms are some of the largest purchasers of professional liability insurance products. They aren't the only ones designing structures or products, though.
Many companies provide these services such as a contractor that provides certain designs related to their trade (i.e. an HVAC contractor recommending the proper units and installation design), or even a machine shop that is drawing up a design to replicate a certain part.
If you take any part in the design of a product (whether as a contractor, engineer, manufacturer, or architect), you might have a professional liability exposure.
Although contractors and manufacturing companies often do not carry the same E&O risk as other types of businesses, we recommend this coverage in certain instances separate from the design component. These policies guard against errors like faulty materials, mistakes in material ordering, and – in the case of manufacturing –mistakes in the finished goods, even if they only resulted in financial harm to the client (product liability requires bodily injury or property damage).
Because programming and IT services have the potential to cause great financial loss to an organization, we suggest all technology companies purchase a technology E&O insurance policy.
Since an error in software or a misconfiguration doesn't directly cause physical damage or bodily injury, this is a coverage gap that many tech companies face if they only purchase GL insurance.
A technology E&O policy not only covers your advice like a traditional E&O insurance policy, but it will also cover errors in programming and technology configurations that happen.
Almost every company that directly treats patients in the healthcare industry needs medical malpractice. Your advice, or procedures you recommend that harm the patient, could lead to a malpractice lawsuit. These lawsuits are frequent and can sometimes lead to massive judgments. We highly recommend that you talk with a broker with experience writing coverage in the medical industry.
Errors and omissions insurance cost is highly correlated to the amount of risk that your business has. For example, a large contractor would pay less than a structural architect with the same amount of revenue.
That being said, for most small businesses, we see these policies start at around $1,000-$,1200 for the year. They go up depending on the size and risk of your business.
For some specialized policies, such as technology E&O insurance, begin at around $500 for freelancers that do non-cyber security work. Examples of this work include web developers or digital advertisers.
If you would like a quote and some recommendations on what policies you might need, let us know. We will work to understand your business and put together a solution together that fits your budget and coverage needs.
You need insurance - we can help.
Start your free quote today.