Texas Errors and Omissions (E&O) Insurance
What is it?
Errors and Omissions Insurance, or (E&O) coverage is
a kind of liability insurance. Sometimes the term is used interchangeably with
“professional liability insurance” or “professional malpractice insurance”, but
there are some subtle differences. However, they all differ significantly from
Commercial General Liability insurance, with which they are sometimes confused.
E&0 insurance might be thought of as an “umbrella”
form of liability insurance under which professional liability and professional
malpractice insurance fit. To clarify, the term “umbrella”, is not being used
to suggest that it is excess insurance. Instead, E&O is the broader category and
professional liability and malpractice insurance are the more narrow
categories. By way of example, E&O insurance may be available for the following
categories of professions or occupations:
--brokers and agents of various sorts
--medical testing facilities
--real estate appraisers
In contrast, professional liability or professional
malpractice insurance are the terms generally used when medical, legal and some
other kinds of professionals are the insured.
The foregoing listing is by no means an exhaustive
list of the kinds of people or entities who or that may have the need for E&O
insurance. It is often sought by people engaged in professions and various types
of technical work, in which an errors or omissions mistake made by them could
cause financial damage to another. The common denominator is that persons
interested in E&O insurance generally provide advice, services, or counsel.
Coverage under an E&O policy may also extend to
those working for those persons if the underwriting guidelines of the insurer
allow it. Further, employees or assistants could be covered under the legal
respondeat superior. This doctrine places liability upon an employer
for the negligent act or omission of an employee who is working within the
course and scope of his/her employment. Examples of those employees include
paraprofessionals or “quasi-professionals”.
COVERAGE TRIGGERS UNDER AN E&O INSURANCE POLICY
The protection of the Errors and Omissions Insurance
or E&O policy can be triggered when, by the unintentional wrongful act of the
insured, a client or a customer is financially damaged. Usually, this means an
injury that can be translated into economic terms (i.e. money or a money
equivalent, such as lost opportunity to earn money). As is the case with any
liability insurance, wrongful acts committed intentionally are not usually
covered. That is because liability insurance applies to fortuitous (accidental)
occurrences, not ones that are purposely done.
HOW IT WORKS AND WHAT IT DOES
If an insured makes a mistake in the work that
he/she/it was hired to do and that mistake causes financial harm to another,
the insured bears a potential liability to the injured party. Specifically, the
insured could be held financially responsibility for the foreseeable damages
that the insured sustained. The mistake could be in doing something that the
insured should not have done, or in not doing something that it should have
done. The basis of responsibility may be asserted in terms of negligence, breach
of contract, or both.
ELEMENTS OF NEGLIGENCE
Negligence is usually defined as the failure to act
in a way, or attain a standard of care, that a hypothetical “reasonable person”
would act or attain under similar circumstances.
The “reasonable person” is not a real
person. Instead, it is a theoretical one (a “legal fiction”) who has essentially
the same experience and training as the insured does. The “reasonable person”
analysis tries, to the extent possible, to compare “apples to apples”, and may
even take into account the standard of care that prevails in the geographic area
where the loss occurred.
If a negligence claim arises, a lawsuit filed, and
if it goes to trial, the Plaintiff (the person claiming to have sustained
financial damage) will have to present evidence that the Defendant (the person
being sued for financial damages) did not reach the required standard of
care. One of the ways that that is routinely done is by having an “expert
witness” testify. That person is used to try to establish the required standard
of care and to show that the Defendant did not reach it. The Defendant will
usually also have an expert witness to try to show that the performance of the
Defendant did meet the standard of care and was not negligent. That is why
negligence lawsuits often become battles of experts. It is also why negligence
lawsuits get very expensive.
In addition to proving negligence, the Plaintiff has
to prove that the damages being claimed were the “proximate consequence” of the
negligent act, (an Error or Omission). This means that were it not for the negligence, the damages would
not have occurred—that the negligent act was the direct cause of the
damages and that there were no intervening causes.
“Breach of contract”, in this context, means that a
promise was made to perform a certain task or set of tasks, or to render advice
or counsel, but failed to do so in some material way. The other party must be
able to prove that he/she/it sustained measurable damages as a result of the
BENEFITS OF E&O INSURANCE
There are numerous benefits to you and to your
business of E&O insurance. Some of them include:
1. The insurance company investigates the claim at its own
expense. This involves an adjuster taking statements, assessing that which the
insured did or did not do in the course and scope of the work, evaluating
whether or not a requisite standard of care was met or was not met, determining
whether there may be comparative or contributory negligence on behalf of the
claimant, and evaluating claimed damages. It is very important that the insured
cooperate fully with the insurer in this process; it is a requirement of Errors
and Omissions Insurance coverage under the policy terms.
2. If the insurer determines that there may be
negligence or breach of the contract to perform services, and that damages
resulted from errors or omissions, it will attempt to settle the claim upon the best possible terms of
your errors and omissions insurance policy without risking a lawsuit. This may
or may not be possible. The insurer has an obligation to you to settle within
policy limits if that can be done. Sometimes the policy provides that the
insured has to approve a settlement. Some policies also provide that the insured
has to contribute a certain amount to the payment of the claim; this is similar
to a deductible.
3. If the claim cannot be settled and you get sued,
the insurer has an obligation to defend you. In general, this involves hiring
and paying a lawyer to represent you in the lawsuit. It is critical that you
cooperate and work with the attorney in the defense, attend depositions, and
otherwise comply with all directives. The failure to do so can jeopardize your
defense and coverage under the policy.
4. If you are found to have committed the wrongful
act alleged by the Plaintiff, and barring any coverage defenses, the insured is
obliged to pay on your behalf the damages found to be due. Under ordinary
circumstances, that amount is limited to the dollar limits of the policy. The
insured should be aware that some policies provide for “burning limits”. This
essentially means that the amount spent by the insured in investigating and
defending a claim counts against and therefore, depletes the amount of money
available for indemnity. If such a policy provision exists it may have a bearing
on the insured’s willingness to settle the case rather than to be exposed to a
personal exposure to financial damages.