I draft a lot of professional liability policies for clients. Before starting that process I have a list of ten or so fundamental questions that I discuss with them. These are questions that go to the heart of a professional liability policy. They are designed to get the client thinking about the many choices that must be made, and options available, when it comes to offering this type of coverage – regardless of the type of profession. In the end the drafting process is all about nuance and minutiae. But that drilling down can’t take place, or shouldn’t, until there has first been a full discussion of several fundamental policy issues.
In some types of professional liability policies, one of these overarching issues is how to define the term “wrongful act” (or a similar purpose term), as used in the insuring agreement, as one of the requirements to trigger coverage. Some professional liability policies define “wrongful act” as an “act, error or omission.” But others define it as a “negligent act, error or omission.” The difference here is quite obvious and it can have a significant impact in the claims context. This issue, and which route to take, is one that I discuss at length with clients that are embarking on a new professional liability policy.
The significance of how to define “wrongful act,” in a professional liability policy, was on display before the Sixth Circuit in Szura & Co. v. General Ins. Co., No. 12-2505 (6th Cir. Nov. 5, 2013) [enhanced version available to lexis.com subscribers]. Szura involved the availability of coverage, for an insurance agency, under an Insurance Professionals Errors and Omissions Liability policy, for a claim brought by a competing agency. In general, an employee of one agency left and went to work for another agency and began selling insurance products to his former agency’s customers. You’ve heard this story before.
Szura, the defendant in the agency dispute, sought coverage under an E&O policy. Putting aside the issues that were before the District Court, the Sixth Circuit concluded that no defense was owed because the policy defined “wrongful act,” in relevant part, as “any actual or alleged negligent act, error or omission.” The court concluded that this definition was not satisfied because the allegations in the underlying complaint were that Szura intentionally interfered and improperly interfered with contracts and business relationships (as well as engaged in a civil conspiracy to do so). The court held: “The Coverage Provision extended only to claims that arose out of ‘wrongful acts, and only conduct that sounds in negligence is deemed a wrongful act as that term is used and defined in the Errors and Omissions Policy. None of the factual allegations in Mayfair’s complaint against Szura sounded in negligence, and it therefore follows that General Insurance had no duty to defend Szura against Mayfair’s claims.”
This sounds very basic, I know. But if the policy had defined “wrongful act” as an “act, error or omission,” without the negligence modifier, then, in all likelihood, the insurer would have been obligated to defend (putting aside whether coverage was owed for a claim brought by a competitor and not a customer). And, in many instances, professional liability policies do define “wrongful act” as just an “act, error or omission.” And when that happens I suspect it may not have always been the result of a conscious decision during the drafting process, but, rather, because the old form, being used as the model for the new form, defined it that way.
I recognize that, when a professional liability policy defines “wrongful act” as simply an “act, error or omission,” there is usually an exclusion that precludes coverage for intentional, fraudulent, criminal, malicious, etc. conduct. But such “state of mind” exclusions can be difficult to apply. Moreover, they often-times do not serve as the basis to disclaim a defense until there has been a judicial determination of such type of conduct. This can add a whole other layer of complexity.
A professional liability policy that defines “wrongful act” as a “negligent act, error or omission” is not the same as one that defines “wrongful act” as an “act, error or omission” and then uses an exclusion for certain intentional-based conduct. This, and at least nine others, are things to consider when putting pen to paper on a new professional liability policy.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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