Considerations when examining an E&O program
Considerations when examining an E&O program08.02.2018
The insurance marketplace and many professional service firms have addressed the increasing need for management liability, including employment practices (EPL) and directors and officers (D&O), and cyber insurance by respectively offering and obtaining such coverages as part of their errors and omissions (E&O) or professional liability (PL) policies. While such an approach is viewed as cost effective allowing professionals to better afford and protect themselves within the framework of one policy form, it is not without its potential pitfalls and could result in unintended consequences. I therefore thought it useful to examine where this underwriting trend could result in claim activity involving professionals and their E&O/professional liability business partners (both carriers and insurance intermediaries).
At the outset, it is critical to note that, for the most part, an E&O or PL policy that includes D&O, EPL and/or Cyber coverage does so by an endorsement(s). Such endorsements are generally far less robust in terms of the scope of coverage afforded than found in a stand-alone policy. Thus, if an insurance broker or agent recommends one of these multi-coverage polices, he or she should at a minimum point out that broader and more comprehensive coverage might be available with a separate D&O, EPL and/or Cyber policy admittedly likely at a higher premium. There might also be other coverage terms that could be implicated such as, for example, coordinating different retroactive dates that might be found on separate E&O/PL, D&O, EPL and/or Cyber policies. While an insurance intermediary may not have an obligation to advise or guide if a client simply instructs to obtain a multi-line E&O or PL policy, I can see a Court holding an insurance agent or broker higher standard of care in situations where a multiline policy is part of a proposal with standalone options creating a duty to point of the policy structure differences.
Separate and apart from cost, another reason a professional might choose one E&O/PL policy that also provides these additional coverages is for convenience and ease, and a “sophisticated” policyholder may think he or she is avoiding any gaps in coverage by having all the coverages under one policy with one insurer. While this certainly could turn out to be the case, it is equally possible that the differing insuring agreements, the lack of policy definitions or the use of policy terms on one subject endorsement may differ as compared to the base policy form could lead to a different result. There are numerous court decisions addressing, for example, a D&O insurer declining coverage to a claim under the professional services exclusion (which arguably would be covered under an E&O policy). I could certainly see a new line of coverage litigation with coverage lawyers for an insured advancing creative arguments (perhaps arguing that one multiline policy misleads an insured into believing any gaps in coverage have been filled) and alleging bad faith if a claim is denied under a policy offering E&O and D&O under this example.
Finally, insurance intermediaries and insurers are not the only ones that may face a new type or style of claim. Under an E&O/PL, EPL D&O and/or Cyber policy, a professional insured may have differing limits of liability for each coverage part that may be subject to a policy aggregate. Thus, a cyber breach or EPL event could not only erode the cyber or EPL limits, but also the policy aggregate resulting in a reduced aggregate E&O or PL limit. If a professional insured is contractually required to maintain a certain level of E&O/Pl coverage, under such a scenario, a non-E&O/PL claim could result in a breach of that contractual obligation. This would obviously not be the case with separate policies for each coverage. A possible remedy for this would be to have a higher aggregate for a multi-line policy with its financial impact
In the end, this discussion in no way is intended to downplay the pros of having E&O/PL, D&O, EPL and/or Cyber covered under one policy. Rather, my goal is for the professional to be educated about the potential impact of the same and be able to take the necessary steps to avoid claims that could arise.