By definition, Errors and Omissions (E&O) insurance covers professionals for actual or alleged errors, omissions or mistakes – caused by them or their products & services – which results in another party’s financial harm. Technology and digital media companies secure E&O insurance to safeguard against claims that the services they provide to others did not function properly. Once triggered by a suit or other demand for damages, an E&O policy will pay to defend the policy holder (pay legal defense fees) and any settlements or judgements that are made against them. This is the case regardless of whether the claim has merit or not. Put simply, an E&O policy responds to claims for a “failure to perform“.
You’ve been served
Commonly, claims come from clients who purchased a service/system and then allege that the system didn’t work, resulting in their financial loss. Let’s use the example of a client that purchases a mission critical software system to manage all of their business’s financial functions…..payroll, payables, receivable, taxes, etc…..the software promises to streamline all of these items where the client was previously using multiple platforms and vendors. Just a week after the client “flipped the switch” and started using the new system there was a crash. All of their data is lost and it takes them two full weeks to correct the problem. During this time they lose thousands of dollars recreating data, paying overtime, contacting clients, incurring penalties for non-payment of bills – and the list goes on. They sue the IT provider for all of the financial damages including their legal expenses, lost opportunity costs & loss of future revenue – and they want their money back for the faulty system which they ended up scrapping.
Insurance to the rescue
In this case if the IT provider were to submit the claim to their General Liability (GL) provider, the claim would be denied. General Liability covers claims for bodily injury & property damage – neither of which occurred in this situation. They would also submit the claim to their E&O insurer. While there is no industry standard, off-the-shelf E&O policy (every insurer has their own contract with it’s own terms, conditions, coverages, exclusions, etc) a typical E&O policy will pay the defense expenses incurred by the IT provider, along with the consequential damages claimed by the clients…..but, most likely, not the return of fees paid for the faulty system. More on this in a future post….
In the end, E&O is a risk transfer tool that companies can use to hedge against claims for mistakes made by their people or the products/services they provide.
Under most Errors and Omissions, Directors and Officers and other liability policies there are certain terms that you must comply with in order for the policy to respond to a claim. The issue that seems to be causing problems for insureds recently is the timeliness of claim reporting. All policies require that the insurer is notified in a certain way, in a specified time frame. And because most people don’t read the “fine print” of their policy, and most brokers do a poor job educating their clients, people tend to sit on potential claims – sometimes until it’s too late. The insurer can deny your claim simply because it was reported too late.
Click Below to see the 7 Common Reasons Why Claims are Not Reported on Time (And As a Result are NOT Covered)
1. “It wouldn’t be covered anyway”
Let the insurance company decide. Another similar statement we often hear is “I didn’t think it would be covered, and didn’t want the insurer to raise my rates if I reported it”. There is no cost to reporting a claim that is not covered. Better safe than sorry.
2. “I referenced the claim on the application”
Under terms of policy indicating on the application isn’t notice
3. “I told my General Liability carrier”
Notice to one insurer is not notice to all insurers
4. “I didn’t have a law suit”
Review your policy’s definition of “claim” (not always a suit)
5. ”We were going to work out the problem”
That means that you knew about the potential claim or should have – and reported it. You can’t decide after your own negotiations fell apart to then hand off the carnage to the insurer
6. ”People are always asking for their money back”
This is often first sign of an unhappy customer and a resulting claim. Check your policy’s definition of “claim”
7. “I protected the insurance company’s interests, too, by engaging my current lawyer who knows my business best”
Don’t assign your own counsel to a claim. Insurers don’t like that! I can’t tell you how many times we get calls from insureds and their lawyers who are months or even years into a claim that we were not aware of – and only decide to look into insurance when they realize how much it is going to cost
Proper notice is critical for coverage to be applicable. All too often policy holders take their coverage for granted and in doing so fail to comply with the terms of their contract – jeopardizing or ruling out coverage. Some simple practices, including open communication with your broker, can help preserve your rights to be afforded coverage under your insurance policy.
- Do not make assumptions
- Talk to your broker
- Remember that a demand for service or money could trigger a notice requirement
- They should know the difference between claims made and claims made and reported
- Look at your policy’s definitions of Claim, Wrongful Act and requirements related to notice of claims or circumstances
- NEVER assign counsel, or try to settle a claim on your own without talking with your carrier
Note: Assist from Chubb presentation at 2010 TechAssure national conference