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Risk management A SUBTLE SHIFT Read policies in their entirety to get clear understanding of coverage By Donald S. Malecki, CPCU
It might not be evident to many insurance people, but a growing number of liability coverages are being transformed from covering intentional acts to covering only negligent acts. The change has occurred over a period of years and while it may be a subtle change, it can be significant. Commercial general liability policies have not been caught up in this trend, despite certain persons, (e.g., some defense attorneys and claims people) who commonly argue that these policies are not intended to cover intentional acts. If they were to read these policies carefully, they would note that the insuring agreement’s reference to “legally obligated to pay” is broad enough to encompass civil liability arising from unintentional or intentional tort, under common law, contract, or statute. It is only after reviewing the exclusions that one will notice the extent to which this broad grant of coverage has been honed. Take, for example, the Electronic Data Liability Coverage Form CG 00 65, introduced for use by ISO in December 2004. This form, or something like it, should be seriously considered by those who are not in the “computer products or services” business. (Those in this latter category need to explore Technology E&O coverage.) In looking at this Electronic Data Liability (EDL) Coverage Form and the reference to the phrase “legally obligated to pay,” one could easily conclude that coverage is as broad as the CGL policy. This point is strengthened by the fact that the first exclusion (like that of the CGL policy) precludes coverage for electronic data loss expected or intended from the standpoint of the insured. The caveat here is not to assume anything until the entire document is reviewed. The reason is that another provision of this EDL coverage form’s insuring agreement makes coverage contingent on loss of electronic data caused by an “electronic incident,” defined to mean “an accident or a negligent act, error or omission.…” As a side note, what may be confusing, even to the more seasoned veterans of the insurance business, is why it is necessary to insert an exclusion for intentional loss or injury, when the coverage being provided is limited to negligent acts. The exclusion probably has been inserted to avoid any arguments over intent. In doing so, however, it may cause some confusion to purchasers of insurance who may not be as sophisticated as insurance company product development people. Intentional acts vs. negligent acts An independently filed endorsement that has always limited its coverage to negligent acts, errors or omissions is the Employee Benefits Liability Coverage Form. ISO’s version of this coverage, newly introduced in 2001, provides the equivalent coverage of negligent act, error or omission, but in a roundabout way. It does so by covering any act, error or omission thereby giving the appearance of being broader. Reading on, however, one will note that this coverage applies by reason of negligence only. Although there have been a number of disputes over this coverage, none to this writer’s knowledge has affected the subject of intentional vs. unintentional acts. One such case that involves this subject is Twin Maples Veterinary Hospital, Inc. v. Cincinnati Insurance Co., 824 N.E.2d1027 (Ohio. App. 2 Dist. 2005). Briefly, two veterinarians, who were employees and owners of the hospital, maintained a businessowners policy (BOP) covering employee benefits liability and professional liability. These defendant insureds also maintained a professional umbrella liability policy. Another veterinarian, formerly an employee and part owner, filed suit against the professional corporation and its two owners alleging that, as the majority owners and officers, they attempted to squeeze [her] out as a minority shareholder without paying the agreed value of her common stock in this professional corporation. Since their insurer denied coverage and defense, the two owners settled the matter and then filed suit against the insurer. The issue was over the Employee Benefits Liability Coverage Endorsement and the insurer’s denial based on coverage, in part, being limited to negligent conduct. The allegations were that the defendant-insureds not only disregarded their duties and functions and unlawfully, fraudulently, and improperly withheld payment to share in the annual bonus pool, but also converted the bonus money to their own uses. From the court’s perspective, what these defendant-insureds did was to act intentionally. Another argument of the defendant insureds was that the endorsement’s reference to “negligent” modifies only the word, act, and not error or omission. This is a common argument of plaintiff-insureds and so, too, is the common conclusion echoed here by this court holding that the endorsement was limited to any act, error or omission that was negligent. Nonstandard policy cases Where the difference between intentional acts, errors or omissions and negligent ones may take on more importance is with certain nonstandard policies. Included in this category are Technology Errors and Omissions, Non-profit Directors and Officers Liability, or Condominium Association Directors and Officers Liability policies where coverage for intentional acts would more than likely be expected. With these types of policies, the term “wrongful acts” commonly is relied on instead of reference to any acts, errors or omissions, or negligent acts, errors or omissions. If there is any caveat here, it is that one should not assume that the term “wrongful act” necessarily is broad in scope. When D&O policies were first introduced, “wrongful act” was commonly defined to mean “any act, error, omission, misstatement, misleading statement, or breach of duty.” Some insurers, however, are reducing this broad coverage by substituting “negligent act” in place of “any act.” An actual case in point is Golf Course Superintendents Association of America v. Underwriters at Lloyd’s, London, 761 F.Supp. 1485 (1991). The employer brought an action against the insurer of its D&O policy seeking indemnity for an amount of a judgment brought against the insured by an employee who claimed he was discharged in retaliation for filing a suit that alleged discrimination. Since the employer was found guilty of retaliation, viewed as an intentional tort, Lloyd’s argued that no coverage applied under its policy. In looking at the policy’s definition of “wrongful act” and the term “negligent act,” the U.S. District Court for the district of Kansas agreed with Lloyd’s. The point here is that one should not take for granted that reference to “wrongful act” within the insuring clause or elsewhere in the policy is as broad as it may appear. The same goes for the insuring agreement referring to the phrase “legally obligated to pay.” If it turns out that this term or phrase means “negligent act,” the policy’s coverage may likely fall well below the purchaser’s expectations. This is an especially important consideration, given that board members and officers often make conscious and intentional decisions in the furtherance of the entity’s activities. Another type of professional liability policy where the trend appears to limit coverage to negligent acts instead of intentional acts is that written for architects and engineers. It may come as a big surprise to these professionals (usually after something happens) to learn they have no coverage for their conscious and intentional decision-making processes resulting in damages. The big question What may beg the question here by some is why some insurers are cutting back their coverages from intentional acts to negligent ones. After pondering the question, there are any number of reasons behind this trend. Since many coverages traditionally are drafted based on what other insurers are doing, one might conclude that some insurers are caught up in the so-called “follow the leader” syndrome. On the other hand, some product development people may not even realize the significance of these various terms, or understand why some professions actually need coverage for any acts. Still others simply may want to avoid having to pay as many claims as might otherwise be the case, if broader coverage were to be provided. There are not many provisions of policies that might be considered as “deal breakers.” Depending on the nature of the business, however, this subject of any act vs. negligent act could well fall into that category. Unfortunately, there are not likely to be many insurers that will accommodate requests to change their forms. Unless a form can be found providing broad coverage, which is sometimes possible, purchasers of insurance need to exercise caution and rely on one or more of the risk management techniques that could be implemented to avoid problems.* The author |
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