A professional liability policy that lapses when the contract it was bought for ends can leave a business without cover when a claim arrives later, according to Devin Brown, vice president, specialty at Vailo, a managing general agent.
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In an interview with Insurance Business, Brown said one of the biggest misconceptions he sees about errors and omissions (E&O) insurance is how the policy works, and that many buyers assume it behaves like the commercial general liability (CGL) cover they already hold.
Brown said many businesses are used to buying CGL, which typically works on an occurrence form. E&O, he said, is written on a claims-made form.
CGL stems from bodily injury and property damage, he noted, so a pure financial loss arising from something a business said, or failed to raise, can fall outside it.
A claims-made policy, Brown said, “needs to be active and in force to submit a claim.”
Many buyers purchase E&O to satisfy a contract, he said, rightly or wrongly. When the contract ends, some conclude they no longer need the policy and let it expire.
The difficulty, Brown said, is that an E&O claim usually follows advice or a service that was acted on, and the claim can arrive well after the work is done. The client may be made aware of a problem with the advice or the software after the policy has expired, he said.
“You don’t actually have coverage despite paying for it,” Brown said.
Brown said a business has two options: renew the policy, or buy what is commonly called an extended reporting period. The extended reporting period is designed for exactly this situation, he said. It gives a window to report a claim arising from advice or professional services provided between set dates.
In most cases, he said, the maximum is about six years.
He added that there is an opportunity to educate clients more on the issue.
Brown said the timing favours buyers. The E&O market is still soft, with plenty of insurers competing for business, he said, which makes it a good time to buy cover, raise limits and build a record with insurers. He added that the scope of cover is also widening, with more cyber integrated into E&O policies.
Brown said many businesses have historically bought insurance only to comply with banks, landlords or certificate requirements. Lenders rarely thought about E&O, he said, even when professional services were a business’s main exposure. They typically asked for a CGL policy.
As brokers have learned more about E&O, and as E&O underwriters have explained the gaps, some accountants and consultants who have been insured for 15 years or so are asking whether they bought the right cover, he said. He said existing businesses are being converted to E&O cover that, in his view, they should always have had.
Brown said the ambiguity between E&O and CGL is what he wishes more businesses understood before they need to file a claim.
Many people have historically viewed CGL as the only route for bodily injury and property damage, he said. Many E&O policies now include extensions for bodily injury and property damage, provided the loss arises from professional advice, he noted.
E&O policies have evolved considerably, he said, and are broader and more widely applicable than they were. They began in medical malpractice, accounting and other more heavily governed professions, he said, and a growing number of professions outside those are looking to buy cover.
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Brown said there is also value in buying E&O and CGL from a single market, because it avoids a dispute between the two policies over whether a loss belongs under CGL or E&O. The dispute is common, he said, in design-and-build or design-and-install work when a product or system fails. Before forensic specialists get involved, he said, the question becomes whether the installers or the design was at fault.
“Almost always, it’s a combination of the two,” Brown said.
Brown also noted the limits of CGL.
“CGL policies do have gaps, especially as they pertain to any sort of professional advice, and especially financial loss,” he said.
