Situations in Which E&O Claims May Arise
Situations in Which E&O Claims May Arise08.01.2017
My seminar to an association of insurance agents included a discussion of the types of situations where error and omissions (E&O) claims could arise. One scenario that generated significant discussion was exposure from coverage gaps that could arise from policy exclusions and the interplay between (i) general and professional liability policies; and, (ii) primary and excess liability policies.
Two recent court decisions highlight the reality of this exposure. In State Farm v. Morningstar Consultants, a building inspector was sued in eight lawsuits arising out of the alleged failure to detect conditions at several construction projects that resulted in property damage. The CGL policies issued by State Farm to Morningstar contained an exclusion for the rendering or failure to render professional services including “supervisory or inspections services”. Morningstar argued that (i) the exclusion was inapplicable as it did not have a professional license and therefore could not render professional services; (ii) the application of the exclusion would render the policy issued to it as a building inspector meaningless effectively precluding coverage it was intended to provide. The South Carolina U.S. District Court rejected these arguments finding the plain meaning of the inspection exclusion negated coverage. (I would note, and likely the subject of another blog, the issue of what constitutes “professional services” often goes beyond the person performing the service, licensed or otherwise, to the service itself being performed.)
In Energy Insurance Mutual v. Ace American Insurance, a massive explosion occurred when an unmarked petroleum pipeline was struck by an excavator. The lawsuits that followed against a variety of defendants were settled, and the excess insurer for the pipeline owner sued the insurer for the staffing agency that provided construction inspection personnel for defense costs and settlement payments. At issue in the staffing agency’s excess policy was whether the tort claims arose from the (non)performance of services were professional in nature. Similar to the case cited above, Energy Insurance argued it was reasonable to expect coverage for the staffing agency providing inspection personnel or such polices would otherwise be illusory. The California Court of Appeal, recognizing that a professional service exclusion has barred coverage for damages beyond traditional “professions” (doctor, lawyer and the like), found the exclusion applicable to the specialized knowledge needed to map and mark underground pipelines. Of particular relevance to this discussion, the Court noted that the relevant parties “could have purchased (E&O) coverage but declined to do so”.
One last real life example bears mentioning. I was looking at a large loss sustained by an insurance agency in connection with it obtaining an E&O policy. That agency had procured for a client a CGL policy with a domestic admitted insurer and an excess policy with an excess and surplus insurer. The excess policy was not a following form policy, and excluded claims arising out of acts or omissions by independent contractors. The agency client faced a wrongful death lawsuit arising out of the work performed by an independent contractor and, while the primary insurer provided coverage, the excess insurer refused to participate in any settlement relying on the independent contractor exclusion. The agency’s client claimed its prior policy did not have the exclusion, and it was not apprised by the agency of the policy change. The agency advised that the policy change was due to the lower cost of the excess and surplus lines policy, but had no documents to support its contention. As a result, the agency’s E&O carrier stepped in and participated in the wrongful death settlement.
The lesson to be learned from this discussion is that, when an insurance agent is requested and agrees to provided insurance coverage to cover business operations, it is critical to (i) understand the nature of the operations; (ii) identify the policies that could address the exposures faced; and, (iii) document if a client is aware of and/or does not agree to purchase insurance to cover potential gaps in coverage.
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