I’m working on an insurance policy renewal for a Technology, Computer & IT Services based small business. This is for their Professional Liability / Errors & Omissions insurance coverage.
The insured wants to know the advantages of keeping this E&O insurance policy and the coverage differences compared to General Liability insurance.
Here’s a nice two-minute explanation from The Hartford to address this exact question:
If you ask me, all Technology, Computer and/or IT Services based businesses should carry both professional liability (E&O) and General Liability to protect their risk exposures, without question.
Your clients can sue you for a wrongful act in providing professional services, which can be the result of an act, error or omission; very often, it is not the result of a mistake, but rather displeasure with the outcome, and even frivolous lawsuits will incur defense costs
The best part is that both coverages can often be packaged into a single policy together.
Every business has unique risks that can seriously harm an organization’s operations if not properly protected against. As a business utilizing technology to produce and deliver products and/or services, it’s important to recognize and take precautions against risks that your Commercial General Liability insurance coverage does not include.
Technology Professional Liability insurance coverage, also referred to as Tech Errors and Omissions (E&O) insurance, is essential for companies using technology because it addresses a lack of protection in Commercial General Liability policies, which typically do not cover claims of third-party financial harm.
Who needs Tech E&O Coverage?
Not only technology industry businesses have technology-related risks. Most companies today utilize technology in some part of providing a service or product and need to take the necessary precautions. To ensure your company is covering all bases, a full risk management assessment is needed.
What does Tech E&O cover?
Tech E&O insurance manages risks, resulting from providing a product or service to a third party, that are not covered by a Commercial General Liability insurance policy. Specifically, Tech E&O insurance protects your business in the event that a third party suffers a financial loss due to your product or service not performing as it was intended or expected, including the event of an error or omission committed by your company. These insurance policies also cover defense costs in the event of litigation.
Tech E&O coverage would apply in the following situations:
- A mistake was made and an error in the code of a website or program your company produced isn’t found before it is implemented. A third party depends on this product or service to operate its business and its operations are stalled due to the error, causing them a financial loss.
- A part your company produces is installed in a piece of equipment. After a short amount of time, the component simply stops working, causing the equipment to fail to work, but otherwise not damaging anything or hurting anyone. The third party that relies on this equipment for its business has to stop operations and suffers a financial loss.
- An employee of your company recommends that a client make an adjustment to its network. The client follows the advice and its network crashes as a result, causing a time and financial loss for its operations.
In all of these cases, Commercial General Liability insurance coverage would not cover a claim or any costs of litigation because of the presence of an error and the lack of resulting physical damage to the third party’s property.
Contact me anytime to learn more about protecting yourself with a comprehensive professional liability insurance policy.
This is a guest blog from Harold Mayhack, a colleague here at ISU/The Olson Duncan Agency. Harold received his Bachelor of Arts in Business Administration from the University of Strathclyde in Glasgow, Scotland in 1985. He spent several years underwriting lawyer’s professional liability insurance before becoming an insurance broker specializing in the insurance needs of law firms. For the past twenty years Harold has worked with local law firms; assisting with all of their insurance and risk management needs. He has presented to law firm groups and members of the Association of Legal Administrators and has been published in legal administrators’ newsletters. He is a member, and former local steering committee member, of the Professional Liability Underwriting Society; the Insurance Brokers & Agents Association and the ISU Network.
This is the first of several blogs that will focus on the pricing mechanisms for lawyers’ professional liability insurance; from the basics to some more subjective items underwriters take into consideration. Essentially, we are going to review the application as it impacts the final cost of your insurance with the hope that you will know the impact of your answers and what information you can provide to help underwriters offer their best pricing; they really do want to write your law firm’s insurance. We will also touch on a few questions that can qualify or disqualify your firm from some of the ‘preferred’ programs.
The first, and I believe the most important, consideration for law firms to consider when you complete your applications is the attitude brought to the process; why are you doing this? The application is your opportunity to tell the story of your law firm; why should an underwriter want to insure you and why should they offer you the best pricing they have available? Many of the applications we see include the basic answers but no additional details; especially for mid to large size firms, firms with higher hazard areas of practice or claims, the subjective picture we paint can be as important as the objective answers in the application. Why are you different? Every principal or firm administrator I meet is very proud of their firm; yet that often does not come across in their application. This is the information we want to provide to underwriters.
We will include this ‘attitude’ consideration in each of the sections that follow. Some things to keep in mind are; you started your firm for a reason, let’s explain that reason. You hired your attorneys and non attorney staff for a reason, let’s explain that. You manage your firm and its’ structure the way you do for a reason, again let’s explain that. If you have claims let’s explain why. Yes, this takes some time but it pays dividends in the number of insurance offers you receive and the premiums and terms of insurance you will have to consider.
Beginning with the basics, APPLICANT INFORMATION; your firm’s name, is it correct in the application? Most of the lawyers’ professional liability insurance policies available state; ‘we shall pay on behalf of the insured’. Insured is typically defined as the Named Insured, which will be listed on the policy’s Declarations page. This seems obvious but it is not unusual to see the Named Insured listed incorrectly. This becomes more important as we look at the definition of insured which will typically insure principals, employed attorneys, attorneys ‘of counsel’ and independent contractors among others and will include the limitation ‘for legal services on behalf of the Named Insured’.
Also requested in APPLICANT INFORMATION, your contact information; address, phone number, contact name, email and often year established. Most importantly, this is the information the insurance company will use to issue legal notices they are required to mail directly including; notices of non renewal, coverage changes among others. However, they also impact your premium. Most insurance companies have some form of territory rating; metropolitan areas like Los Angeles or San Francisco are often rated with a higher premium than outlying areas. Your year established is used as one factor along with your insurance history in the consideration of prior acts coverage. This date should be the establishment date of the earliest entity to which the current Named Insured is the majority successor in interest to ensure the policy will include the necessary prior acts coverage.
The next few blogs on pricing lawyers professional liability insurance will take us through the remaining application questions and several of the key supplemental applications. If you have any questions about any of the issues raised here please feel free to call me at any time. I would also appreciate any comments or feedback you would like to share.
Two different methods are used by insurance companies to determine coverage when writing liability insurance:
- “claims made” policies
- “occurrence” policy
Most often, commercial general liability insurance is written on an occurrence basis while employee benefits liability, professional liability and employment practices liability insurance will be written on a claims-made coverage form.
On an “occurrence” policy, the coverage trigger is the date of the event or accident giving rise to a claim. The policy in force on the date of the event causing the loss must respond with both defense and/or indemnity. Even if a claim arises years after a policy has expired, the date you receive notice of the claim doesn’t matter. Occurrence policies do not provide coverage for prior acts. They do remain available for claims that arise years after a policy term has expired, however. If an accident or event occurs during the term of an occurrence policy, that policy must respond to any future claim.
As for claims-made policies, coverage is triggered by the date you first became aware and notify the insurance carrier of a claim or potential claim. The carrier’s policy in force on the date you became aware and give notice is the insurer who must defend and settle the claim. A claims-made policy may reach back in time and provide coverage for claims made today from negligent acts, errors or omissions that occurred years before the policy was purchased.
The following conditions must be met before prior acts coverage is granted:
- You must receive notification of a claim or potential claim situation during the policy period.
- The claim or potential claim situation must be reported to the insurer during the policy period.
- The negligent act, error or omission giving rise to the claim must occur after a “prior acts” or “retroactive” date listed in the policy declarations.
- You or your firm had no prior knowledge of a mistake, error or controversy on the date coverage was purchased.
The “prior acts” or “retroactive” date is a crucial piece in a claims-made policy. Your policy declarations page will clearly identify a “retroactive” date that determines how far back prior acts coverage extends. Claims resulting from services rendered before the “retroactive” date are not covered.
Think before you decide to cancel or non-renew your claims made liability policy
If you decide to cancel or not renew your claims-made policy, you must consider purchasing an Extended Reporting Period or “TAIL” coverage to insure you for incidents which occurred while the policy was in force but was reported after the policy was cancelled. For example:
If you purchased a claims-made policy with an effective date of January 1, 2010 and chose to cancel or let the policy lapse without TAIL coverage or an Extended Reporting Period — any claims made after December 31, 2010 would not be covered. If you were sued in 2012 for a wrongful act committed in 2010 (during which time you were covered), the insurance company would not be responsible for paying any claim. An Extended Reporting Period Endorsement (TAIL) “extends your right to report a claim” to your prior insurance company after the policy has ended, canceled or lapsed.
As I often note, make sure your insurance agent is knowledgeable and experienced with claims made insurance forms. It gets complicated. Also, note that I am writing this from an insurance perspective; only to be used for informational purposes! My intent isn’t to provide legal advice here. That’s what lawyers are for…
Most businesses have no difficulty getting insurance in the “standard” insurance market, but if your business has a significant loss history or is engaged in high-risk operations, you might not be able to find insurance in the standard commercial insurance market. This doesn’t mean you’re out of luck as a business owner. Rather, you’ll be looking at the “surplus” lines insurance market for your business insurance.
The surplus lines insurance market, also referred to as the “non-admitted” market, is a segment in the insurance industry where the more difficult or unusual risks are written. Examples of specialized risks include professional liability insurance or high risk business operations such as a manufacturer of medical devices or explosives.
Insurance brokers usually turn to the surplus lines market for their clients after they are denied by at least three state licensed “standard” commercial insurance carriers. Most states identify the standard lines insurance companies as “admitted,” “licensed” or “standard” and the excess and surplus lines insurance companies as “non-admitted,” “unlicensed” or “non-standard.” However, these terms tend to reflect a negative connotation in regards to the strength and security of a surplus lines insurer. The fact of the matter is, most states require surplus lines insurance companies to maintain higher minimum capital levels than they require admitted markets to carry.
As for obtaining insurance for a tough-to-place businesses, the surplus lines insurance market can only be accessed through a specially licensed broker. The broker must have a surplus lines license in order to sell surplus lines insurance. Your broker must provide you with a disclosure notice if your insurance is being issued with a surplus lines company.
Now, for a cheesy analogy to tie this all together, insurance is a lot like love. They say there’s someone out there for everyone. Well when it comes to insurance, there’s an insurance carrier out there for every business. Surplus lines insurance carriers help make the business world go round.
If you are in the business of providing a service to your clients for a fee, you have an Errors and Omissions (E&O) exposure and should consider Errors and Omissions Liability Insurance.
What is E&O insurance?
E&O insurance, also referred to as professional liability insurance, covers businesses or individuals in the event that a client holds such company or individual responsible for a service that was provided, or failed to be provided, and did not have the expected or promised results. In very basic terms, it protects you when you perform a service for your client and they claim it was done incorrectly and caused them harm. Most E&O policies cover defense costs and any resulting settlements and judgments against you or your company, up to the coverage limits on your policy. Your Commercial General Liability policy does NOT provide this coverage.
Who needs E&O Insurance?
Any company that is in the business of providing a service to clients for a fee faces an E&O exposure. Some of the more common professions which need E&O insurance are real estate agents, architects, engineers, doctors, lawyers, IT consultants, and accountants to name a few. The list of professions is a lot more extensive. If you are in doubt as to whether you might need it, consult with your insurance agent.
Why do I need it?
For one, E&O is excluded on general liability insurance policies. More importantly, mistakes are inevitable for any business or individual. Nobody’s perfect.
When should I buy E&O insurance?
The best time to buy errors and omissions insurance is before you begin practicing. If you know you have an exposure, make E&O insurance part of your insurance program before conducting business.
I will be covering more aspects of E&O insurance in future blogs and how it differentiates from general liability insurance. There is no such thing as “one size fits all” in an E&O policy. These policies are customized and tailored to each and every business. It is very important that your insurance agent understands E&O coverage and the marketplace. Neither you nor your business can afford to get it wrong.