What is Errors and Omissions (E&O) Insurance and Why do I need it?
Professional Liability insurance is also called “errors and omissions”, “E&O”, or “malpractice” insurance and is a form of insurance designed to protect professionals and professional organizations from financial loss from their negligence. E&O coverage protects an individual or a company from claims alleging failure or error in the provision of services that result in financial damages to your clients. Coverage includes legal defense costs, no matter how baseless the accusations may be, and the policy will pay for any resulting judgments, including court costs, up to the policy limits. Policies typically do not provide coverage for non-financial losses or for intentional or dishonest acts. (See our FAQ section on Fidelity Bonds for coverage in this area.) Professional liability policies are typically written on a claims-made basis.
Many different types of professionals hold themselves out to their clients as experts in a particular field of work. There is always a possibility that any professional’s work may fail to meet their clients’ expectations, resulting in a professional liability claim or lawsuit. Professionals of all types are being held to higher standards of conduct than in the past and lawsuits (with and without merit) have grown considerably in recent times. Companies are continually exposed to the possibility of claims being made against them for negligent acts, errors, or omissions in connection with the services they provide.
Professional liability insurance is designed to protect the professional from the significant financial loss that can result from a lawsuit. Regardless of fault, litigation is costly, time consuming, and damaging to a reputation.
General liability policies are quite different than professional liability policies. Do not depend upon general liability polices to provide protection from claims for professional negligence. (See our FAQ section on Professional vs. General Liability for additional information.)
Since there are many different variables involved and policies of professional liability insurance come in a wide range of types and coverage, it is imperative that your policy be reviewed by you in order to ensure that you have the coverage you expect.
What does E&O cover?
E&O insurance coverage protects a company, its employees, management team and owners against claims by its paying clients alleging errors and/or omissions or wrongful acts in the execution of services by the company. Common allegations include: negligence, fraud, untimely delivery, misrepresentation, misstatement, professional malpractice, and breach of contract. E&O insurance would protect the organization, its management, and employees in the event of an allegation.
WHAT TYPES OF COMPANIES OR INDIVIDUALS NEED E&O INSURANCE?
If a company’s client could suffer financial damages as a result of you or your company’s failure or error in the execution of their services, your company could be the target of an E&O claim. You can protect your company from the potentially devastating financial damages associated with this type of claim by securing E&O insurance coverage. In today’s litigious environment, many professional service providers across many industries value the security that having E&O insurance brings. It would be nearly impossible to list all service providers who are exposed to E&O risk, but essentially any company that provides a professional service to clients is a good candidate.
HOW IS E&O DIFFERENT FROM GENERAL LIABILITY?
General Liability insurance policies do NOT provide coverage for E&O errors, contract performance disputes and any other professional liability issues. General Liability policies traditionally cover bodily injury or property damage as a result of the insured’s activities, including product liability. Typically, a general liability policy does not cover consequential financial loss and most exclude claims arising out of professional services. General liability insurance is standardized and relatively easy to obtain. It is often provided in a package policy with other insurance coverage, sometimes called a “business office package” policy. Most general liability policies issued to professional organizations contain exclusions for professional liability (E&O) claims. Having both types of insurance coverage are important to properly protect a professional organization from financial loss.
How do Claims Made policies differ from Occurrence policies?
There are two primary forms of liability insurance policies, claims made and occurrence policies. Most professional liability (E&O) insurance is written on a claims made basis. This means that coverage is triggered if both a claim is made against a company and reported during the same policy period. This is in contrast to the type of liability insurance that is triggered by an “occurrence”, which is generally described as an event that occurs during, but may not be filed during, the policy period. The claims made policy covers you for the policy amount you have when the claim is made.
Essentially, the significance of the difference in these two types of coverage is that the occurrence policy will indemnify the insured no matter when the claim is made, as long as the damage or injury occurred during the period of insurance, whereas with the claims made basis, the incident must be reported by the insured to the insurer or the claim must first be made against the insured by the third party, during the period of insurance, provided that the event giving rise to the claim occurred on or after the retro-active date of the policy.
HOW MUCH WILL MY POLICY COST AND HOW LONG WILL IT TAKE TO GET MY QUOTE?
Many factors are considered in determining the cost, or premium, for an E&O policy. Certain professional services are riskier than others and therefore can potentially cause greater damages or losses. There are many factors an underwriter takes into consideration when pricing a policy. A company’s size and length of time in business are evaluated, large companies have greater exposure due to the sheer volume of transactions and number of clients served, experienced professionals and companies often have put risk mitigation policies and procedures in place to help protect against claims, and loss history is another key factor in underwriting an E&O application. Additional considerations include the regulatory environment, location of operations, cyclical nature of the business, use of alternative dispute resolution and client communication procedures. All of these factors guide the underwriter in determining the appropriate terms and conditions of the policy, as well as in pricing the coverage.
Depending on the expiration date of your current policy, the turnaround time for a quote is relatively quick. You can help speed up the process by insuring that the application is returned to us, signed, fully completed and accurate.
WHAT IS A.M. BEST RATING AND WHY IS IT IMPORTANT TO ME?
A.M. Best Co. was founded in 1899 with the purpose of performing a constructive and objective role in the insurance industry toward the prevention and detection of insurer insolvency. This mission led to the development of Best’s Ratings, which are now recognized worldwide as the benchmark for assessing insurers’ financial strength. A Best’s Rating is an independent third-party evaluation that subjects all insurers to the same rigorous criteria, providing a valuable benchmark for comparing insurers, regardless of their country of domicile. Best’s rating opinions reflect an in-depth understanding of business fundamentals garnered from more than 100 years of focusing solely on the insurance industry. This is one reason why insurance industry professionals have consistently ranked Best’s Ratings number one in confidence, usefulness and understanding.
A.M. Best assigns three types of ratings. All are independent opinions, based on a comprehensive quantitative and qualitative evaluation, of a company’s balance sheet strength, operating performance and business profile. They are not a warranty of a company’s financial strength and ability to meet either its obligations to policyholders or its financial obligations but provide an opinion of an insurer’s financial strength and ability to meet ongoing obligations to policyholders.
Why is a Best’s Rating Important? For insurance companies, a Best’s Rating is a strategic tool that can enhance consumer confidence in the organization’s stability, as well as its attractiveness to investors. A rating also enhances an insurer’s credibility with reinsurers; a valuable resource, particularly for insurers entering new markets.
Insurance professionals depend on Best’s Ratings to determine the financial strength and operation of specific insurers, to evaluate prospective reinsurance accounts, to compare company performance and financial condition, and more. A Best’s Rating can influence an agent’s selection of plans to market.
In recent years, ratings also have become an increasingly important factor in consumers’ decisions to purchase insurance. Today’s insurance consumers are well aware of how regional, political and economic instabilities can affect a marginal company. Best’s Ratings provide these consumers with the information necessary for an educated buying decision.
WHO IS LLOYD’S OF LONDON?
Lloyd’s of London is the world’s leading insurance market, transacting business worth billions of pounds in premiums each year. It provides insurance coverage across the range of commercial and domestic insurance requirements and is one of the largest providers of surplus lines and specialty lines insurance and reinsurance in the US. It is not an individual insurance company, but a brokered market in which over 130 underwriting syndicates both compete and co-operate. This allows Lloyd’s to offer a wealth of choice, knowledge, experience and expertise under one roof.
What does Surplus Lines or Non-Admitted mean?
Surplus lines insurers are not licensed in the state where insured or risk is located, although they must be licensed in their state (or country) of domicile. However, all surplus lines insurers are subject to solvency and other insurance department regulation, and must be approved in each state they operate in. All U.S. jurisdictions have surplus lines laws that protect insurance consumers by controlling the eligibility standards of surplus carriers and requiring specially trained brokers and agents to assist the insured.
Surplus lines policies are often used in more difficult or unusual coverage such as professional liability (E&O) and for any insured companies unable to secure insurance coverage from licensed companies, the surplus lines market provides an alternative market with flexibility, additional capacity and innovative underwriting.
The excess and surplus lines market is among the least understood and most misinterpreted segments in the property/casualty insurance industry. An illustration of this is the erroneous belief that surplus lines insurance transactions are unregulated. Quite the contrary, as most states have detailed insurance laws governing the activities of their surplus lines providers and recently there has been discussion that some form of federal regulation could be developed. There are also specially trained brokers are called surplus lines brokers, and must be licensed in their state of residency to transact surplus lines business.
The nature of much of the specialty lines insurance market dictates a flexible market in order to meet the client’s needs. The rate and form flexibility of the surplus lines market provides for a more creative and responsive market.
The surplus lines market is also a proving ground for new products and underwriting concepts. Recent examples of new products beginning in the surplus lines market are employment practices liability coverage and products to respond to hacker exposures.
Since 1994 the A.M Best Company has performed an annual survey of the excess and surplus lines market and has found that its solvency record is as good, if not better, than the overall industry.
What are retro-active dates?
A retroactive date is the date after which your professional acts or services would be covered under a claims made policy should they become the subject of a claim. Any acts provided prior to the retroactive date are excluded from coverage under a claims made policy. E&O policies typically establish a retroactive date once the first claims made policy is put into place. This date will stay the retroactive date through all policies. If you forfeit your retroactive date, you loose any coverage for prior periods. Retroactive dates (retro dates) are also called prior acts dates. All your past work is referred to as your “prior acts” and coverage for your past work subject to the prior acts date, is covered on the currently in force policy.
When considering a change in insurance companies, be sure to check that you have not lost coverage by a change in the retroactive date. Once you lose your retroactive date, you forfeit coverage for any claims that arise out of your past work. Insurance brokers commonly call this “losing your prior acts coverage.” It can be a mistaken decision made by an unknowing insured in combination with a broker that does not understand the consequences and therefore can’t explain it properly, or it can be the only offer of coverage if you have had numerous claims which appear to be due to insufficient risk management on the part of your company.
Losing your retroactive date means all you past work is uncovered by any insurance policy. Claims that surface based upon your ser, and effectively means that the entire premium you paid for past policies is completely wasted. Avoid this at all costs.
WHAT IS A TAIL OR EXTENDED REPORTING ENDORSEMENT?
“Tail coverage,” also called an extended reporting period, is a slang term for an Extended Reporting Period (ERP) endorsement on your policy which provides protection for claims that are filed after a claims-made policy has been non-renewed or canceled. This coverage is optional, and the need can arise if the professional organization is acquired or goes out of business, or a decision is made not to purchase insurance. When you cancel your insurance coverage for whatever reason, a tail endorsement provides coverage should someone sue you after the policy terminates. The tail coverage provides coverage and the company must defend that claim. You generally have 30 days after your policy expires to purchase a tail endorsement. Coverage for acts occurring prior to the policy period is called “prior acts coverage,” and the period prior to the policy period for which claims are covered is called the prior acts period. Prior acts coverage is usually only provided when a claims made policy has been in force immediately prior to the current claims made policy on a basis consistent with the prior policy. Prior acts coverage is defined as “full prior acts”, covering acts occurring at any time prior to the current policy period, or is defined by a “retroactive date.” When a retroactive date is used, prior acts coverage is provided from the retroactive date to the current policy period.
“Tail coverage,” also called an “extended reporting period,” provides protection for claims that are filed after a claims-made policy has been non-renewed or canceled. This coverage is optional, and the need can arise if the professional organization is acquired or goes out of business, or a decision is made not to purchase insurance.
WHAT DOES PRIOR KNOWLEDGE MEAN?
An insurance provider will exclude coverage for any claim if the company or its employees/owners had knowledge of a wrongful act or had a reasonable basis on which to anticipate a claim prior to the inception date of the coverage.
WHAT IS PRIOR ACTS COVERAGE?
(See FAQ on What are Retroactive Dates)
WHAT IS DUTY TO DEFEND?
This means that the insurance company has the obligation, or duty, to hire an attorney and handle the defense of the claim. Its extends to coverage of all of the related costs involved in defending against the suit, including for example, the cost of expert testimony, depositions, etc.
IMPORTANCE OF APPLICATION WARRANTIES
An application warranty is the legal wording generally found at the end of an insurance application. These warranties are legal representations to the insurance underwriters that the information provided by the professional company within the application is accurate and complete. If the information provided is not accurate and complete, insurers may decline to provide coverage if a claim arises. In completing all types of insurance applications, it is imperative to ensure that the information provided is accurate and complete.
REPORTING CLAIMS INFORMATION
All potential incidents that may develop into a claim must be reported to the insurer as soon as possible and in accordance with the terms of the policy. Generally, this is requires reporting a claim that has been made as soon as is practical, consistent with the terms and conditions of the policy. In addition, many professional liability (E&O) policies require the reporting of an incident that could lead to a claim in the future. Not only does diligent claim reporting protect the insured’s interests, it also provides an opportunity to head off potentially litigious situations.
IS A FIDELITY BOND NECESSARY IF I HAVE E&O? HOW ARE THEY DIFFERENT FROM SURETY BONDS?
YES! When a company obtains a fidelity bond, this is actually a form of insurance, as a general matter providing protection from employee theft of assets. In the professional liability context, being “Bonded” refers to the carrying of a fidelity bond. A fidelity bond is not a surety bond, but a form of insurance. For instance, if a company’s bookkeeper were embezzling funds, a claim could be filed. The bond would pay out if a court found the employee guilty as charged. In contrast, in the simplest terms, a surety bond is a guarantee. What the bond guarantees varies depending on the language of the bond. It is a form of credit, not insurance. Surety bonds are often a requirement of certain types of businesses; Title Agents for example, would likely need a surety bond.