What Does Errors and Omissions Insurance Not Cover?
Navigate the complexities of Errors and Omissions (E&O) insurance. Learn what common professional liabilities fall outside its coverage.
Errors and Omissions (E&O) insurance provides protection for professionals and businesses against claims arising from alleged negligence, mistakes, or failures in the delivery of their professional services. This type of coverage is designed to address financial losses a client might suffer due to an error or omission made by the insured party during their professional work. It helps cover legal defense costs and settlement amounts up to the policy limits. The primary purpose of E&O insurance is to safeguard assets and ensure business continuity when unforeseen professional errors occur.
Intentional and Unlawful Conduct
Errors and Omissions insurance policies are specifically designed to cover unintentional mistakes or oversight, not deliberate acts of misconduct. Claims stemming from fraudulent activities, for instance, are universally excluded from E&O coverage. This exclusion applies to any intentional misrepresentation of facts, deceit, or dishonest acts committed by the insured party. Insurance is not intended to shield individuals or entities from the consequences of their own willful wrongdoing.
Similarly, E&O policies do not extend to cover criminal acts or illegal conduct. If a professional engages in activities deemed unlawful, such as embezzlement, theft, or other felonies, any resulting claims for damages or legal defense costs would fall outside the scope of an E&O policy. This also applies to intentional breaches of duty or malicious acts, where the insured knowingly acts with harmful intent. Public policy generally prevents the indemnification of individuals for their deliberate unlawful actions.
General Business Liabilities
Errors and Omissions insurance focuses on professional liability, addressing risks directly tied to the services a business provides, not general operational hazards. E&O policies exclude coverage for bodily injury or property damage. Claims like a client slipping in an office or damage to a client’s physical property are covered by a General Liability (GL) insurance policy.
Employee-related claims also fall outside the purview of E&O insurance. Issues like workplace injuries, addressed by workers’ compensation insurance, or claims of wrongful termination, discrimination, or harassment, covered by Employment Practices Liability (EPL) insurance, are not included. E&O policies protect against claims from clients related to professional services, not from employees regarding employment practices.
E&O insurance does not cover claims related to data breaches or cyberattacks. While professional services might involve handling sensitive client information, damages from a cyber incident are addressed by a dedicated Cyber Liability insurance policy. General breach of contract claims are also often excluded from E&O policies unless the breach directly results from a professional error or omission covered by the policy.
Timing and Scope of Coverage
Errors and Omissions policies contain specific limitations regarding when the professional error occurred or when the claim was made. A common exclusion relates to the “retroactive date” specified in the policy. This date dictates the earliest point in time for which professional acts or omissions are covered; any services rendered or errors made before this date are excluded from coverage, even if the claim is made while the policy is active. For example, if a policy has a retroactive date of January 1, 2020, an error made in December 2019 would not be covered, regardless of when the claim is filed.
Another significant exclusion involves “prior acts” or “known claims.” If an insured professional was aware of a potential claim, incident, or circumstance that could lead to a claim before the policy period began, that specific claim will be excluded from coverage. This prevents individuals or businesses from purchasing insurance after realizing they might face a lawsuit for a pre-existing issue. Insurers require applicants to disclose any known circumstances that could give rise to a claim when applying for coverage.
Maintaining continuous E&O coverage is important to avoid gaps in protection. If a professional allows their policy to lapse or switches insurers without ensuring continuous coverage with a consistent retroactive date, they could lose coverage for past acts.
Damages and Penalties
Errors and Omissions insurance policies are designed to cover compensatory damages, which aim to reimburse a claimant for actual financial losses suffered due to a professional error. Certain types of financial repercussions are excluded from coverage. Punitive or exemplary damages, for instance, are excluded. These damages are not intended to compensate the injured party but rather to punish the defendant for egregious conduct and deter similar behavior.
Fines and penalties imposed by government agencies or regulatory bodies are not covered by E&O insurance. If a professional faces sanctions, such as monetary fines from a licensing board or a regulatory agency like the Securities and Exchange Commission, these penalties are considered outside the scope of the policy. Such fines are a consequence of non-compliance with regulations, rather than a direct financial loss from a professional error. This also applies to tax penalties, unless there’s a specific endorsement for tax professionals.
E&O policies exclude coverage for any disgorgement of profits or restitution. This refers to the return of illegally obtained funds or profits acquired through wrongful conduct. Insurance should not enable an individual or entity to retain ill-gotten gains.