By Paul S. White and Richard L. Neumeier
Traditionally, professional liability insurance has been available to protect professionals such as lawyers, doctors, accountants, and architects against claims of “errors and omissions” in the rendering of professional services through the purchase of Errors & Omissions (“E&O”) Insurance. At one time, some professional liability policies were written on an “occurrence” basis so that there would be coverage if the act or omission on which the claim was based occurred during the policy year, even if the claim was made after the policy expired. In contrast to occurrence coverage, claims-made E&O policies generally cover the insured only for claims that are made and reported during the policy period or 60 days thereafter. Virtually all E&O policies are now written on a “claims-made” or “claims-made-and-reported basis. Section 25.01 defines E&O insurance and compares it to general liability and Directors and Officers (“D&O”) coverage.
Because claims-made policies are typically written with a retroactive date that precedes the policy period, the application will inquire into “any circumstances” that could lead to a claim. The tests used by the courts for answering the “any circumstance” questions are explored in great detail in Section 25.02. If the applicant makes a material misstatement with respect to the “any circumstance” question the insurer may seek to: (1) disclaim coverage based on the prior knowledge exclusion which typically excludes coverage except where “the named insured … had no reasonable basis to believe that Insured had breached a professional duty or to foresee that a claim would be made against the Insured” or (2) rescind the policy. In either case, most courts apply an objective test, but some apply a subjective or mixed test. Courts that apply an objective test emphasize that it is irrelevant that the insured thought the claim to be a negotiating tool or without merit. Even some courts which use a subjective test have sometimes rejected as a matter of law the insured’s story that the insured did not make any error. The mixed test mandates a subjective test for the first part of the inquiry that the insured had knowledge of the suit, act, error or omission, and an objective test for the second part, whether the suit, act, or omission might reasonably be expected to result in a claim or suit. Finally, some courts discuss the “any circumstance” question or prior knowledge exclusion without applying a specific test.
E&O policies provide coverage for claims-made-and-reported within the policy period. Although a tiny minority of forms provide that claims need not be reported within the policy period, most claims-made policies require that the claim not only be made but also be reported to the company within the policy period or within 60 days following the policy period. Almost all jurisdictions enforce this contractual language. Thus, if a claim is made during one policy period but reported in the following policy period there is no coverage under either policy. As to the first policy, while the claim was made it was not reported during the policy period, and as to the second policy, while the claim was reported it was not made during the policy period. Claims-made policies also typically provide for reporting “any act, or omission which could reasonably be expected to give rise to a claim” so that coverage attaches whenever the claim is actually made, even after the policy period. Section 25.03 describes the steps necessary to meet the reporting requirements and determining whether coverage is provided. Section 25.04 explores other insurance clauses in claims-made policies, which are treated no differently than other insurance clauses in occurrence policies. Thus, when the courts construe combinations of “pro rata” or “excess” clauses, they will give effect to the language in the clauses. On the other hand, courts faced some combination of excess/excess, excess/escape, or escape/escape provisions which, typically, result in no coverage under either policy for the insured, rule that the clauses are “mutually repugnant” and must be disregarded. . Claims-made policies also typically include consent to settle (“hammer”) clauses, which require the insureds consent for the insured to settle the case and they are addressed in Section 25.05. Usually, consent cannot be unreasonably withheld and many clauses enable the insurer to limit its liability if there is an opportunity to settle for a certain amount and the insured refuses to settle. Careful attention must be paid to the precise wording of these clauses as there is considerable variance in the insurance industry.
The commonly litigated exclusions for E&O policies are discussed in Section 25.06. Almost all claims-made policies exclude coverage for “any dishonest, fraudulent, criminal or malicious act.” Generally, courts find that this exclusion is not ambiguous, but it does not encompass constructive fraud for breach of fiduciary duty where a former client sues an attorney. Some courts find the exclusion does not permit the insurer to avoid providing a defense. Many claims-made policies provide that this provision does not apply to any insured that “did not personally participate or personally acquiesce or remain passive after having knowledge of criminal, dishonest, fraudulent or malicious acts.” Many E&O policies also provide that the dishonesty exclusion applies only when “determined by a judgment or other final adjudication” and thus this exclusion does not apply to exclude settlements.
Over the last few decades, the specialized training required in myriad professions has led to a booming industry for insurance products that extend coverage for errors and omissions unique to particular professions, to not only include attorneys, medical professionals, architects, engineers, and surveyors, accountants, real estate agents, insurance agents, but also entertainment professionals, movie production participants, internet service providers, websites, writers, manufacturers, media outlets, recording artists, graphic designers, interior designers, landscapers, and multi-media companies as insureds under E&O insurance policies. These products and their unique insuring agreements, conditions, or exclusions are discussed in Section 25.07.
Cross References: For practice guidance with respect to E&O insurance coverage issues, see New Appleman Insurance Law Practice Guide Chapter 38. For practice checklists with respect to E&O insurance coverage issues, see New Appleman Premium Online Checklists Chapter, 38.
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Paul S. White is a partner at Tressler LLP in the firm’s Los Angeles, California office. He represents and advises insurers in insurance coverage disputes and extra-contractual litigation. He also defends and advises insurance brokers and agents regarding professional liability claims.
Richard L. Neumeier is a partner at Morrison Mahoney, LLP in the firm’s Boston, Massachusetts office. He concentrates in the defense of non-medical professional liability and insurance coverage.