A Guide to E&O Insurance

By Ellison, John N.; Frankel, Robert E. | Risk Management, June 1998 | Go to article overview

A Guide to E&O Insurance


Ellison, John N., Frankel, Robert E., Risk Management


In recent years, courts have increasingly held professionals in all fields, including the insurance arena, to higher standards of care by recognizing novel legal theories that vastly expand their liability exposure. This legal trend toward greater accountability of professional conduct and the ongoing consolidation of several industries, including financial services, make it incumbent upon risk managers to understand the issues concerning insurance coverage under professional liability or errors and omissions (E&O) policies.

An understanding of these trends could influence several risk management decisions, including whether modifications to standard-form E&O policy forms are necessary for your company; if the "professional" services your company provides or contracts for are encompassed within the scope of an appropriate E&O policy; if inquiry is required in the event of consolidations of professional firms or E&O insurance companies; and if circumstances warrant the pursuit of insurance coverage rights following a claim denial.

Similarly, E&O insurance should be considered by risk managers in decisions regarding their employers' business relationships. For example, if a risk manager is responsible for selecting a professional to provide insurance advice or services, the security and claims practices of the professional's E&O insurance company should play a part in the risk manager's decision.

Scope of Coverage

In choosing among E&O insurance companies, the scope of the insuring agreement provided by each insurer's policy is obviously paramount. As with other forms of insurance, coverage will depend upon the policy language as well as the law of the governing jurisdiction. E&O insuring agreements generally provide that the insurance company will pay "all sums that the insured shall become legally obligated to pay by reason of liability for any error, omission or negligent act committed, or alleged to have been committed, by the insured while performing services in his professional capacity. . . ."

The phrase "performing services in his professional capacity" has been litigated extensively, and is generally interpreted to include coverage for activities related to the professional's performance of duties in his or her area of expertise. For example, E&O coverage has been found to exist in the insurance area for failure to procure or renew coverage requested by a client; failure to obtain cost-effective insurance; failure to make requested changes in coverage; arranging for inadequate amounts of coverage; errors in connection with claims-adjustment services; and selling a policy outside the scope of the authority granted by the insurance company.

In most cases, the legal resolution of the scope of coverage centers around the professional's initial communications to the E&O insurance company regarding his or her specific roles and activities. To be careful, professionals should include all activities in which they regularly engage, even if the tasks may not seem "professional."

In addition, a risk manager needs to pay particular attention to a number of gray areas, such as incidental services that may be distinct from the activities performed in the capacity of a particular professional. For example, an insurance professional who also engages in mortgage brokerage may have no E&O coverage for errors made in connection with those activities. Courts often justify such limitations on the basis that E&O coverage is not as broad as comprehensive general liability insurance coverage, but instead is intended to insure professionals for liabilities arising from mistakes inherent in the practice of their particular professions.

Thus, risk managers should be aware that E&O coverage is not always available for every aspect of a professional's business. Emphasis should be placed on being as inclusive as possible in describing to the underwriter the scope of the "professional services" for which E&O coverage is being purchased. …

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