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Risk Management Technology E&O insurance and the CGL Integrating the two can present some challenges By Donald S. Malecki, CPCU
Technology E&O is a generic term adopted by a number of insurers offering liability insurance policies to persons and organizations involved in technological services, or with exposures that require a special policy to fill the gaps created by changes that have occurred over time in commercial general liability insurance policies. Considering the unprecedented growth of technology and the wide array of exposures it presents to those at risk, it is difficult to define its parameters. Among those that may be a market for technology E&O insurance are computer software companies involved in the development, installation, and sales of software (custom or packaged); computer hardware manufacturers; telecommunication companies; Internet companies involved in Web site design, systems outsourcing, and consulting services; data service providers; and Internet service providers. While some insurers in the market of handling technological risks will provide both commercial general liability and technology errors and omissions coverage as a package, others provide the two forms of liability insurance separately or simply provide the technological policy without the accompanying CGL coverage. With certain caveats, technology errors and omissions policies could also be viewed as “gap fillers,” since properly structured policies can be also used by those entities confronted with coverage needs brought about by exclusions in CGL policies. For example, if after a computer system is sold, it malfunctions causing a customer’s production line to shut down, the consequential losses will likely be excluded in light of the Impaired Property exclusion (m) of standard CGL policies, which attempts to exclude “failure to perform” claims, in the absence of physical loss or damage. (Most liability policies contain such an exclusion but it is not necessarily designated as “m.”) Likewise, also outside the scope of a CGL policy is loss of electronic data of a customer following a computer system’s breakdown in whole or in part. No coverage applies here, despite physical injury or damage to the computer system, because electronic data is now considered to be intangible property and specifically excluded. Characteristics Technology errors and omissions policies are nonstandard in the sense that no one organization drafts them for use by a number of insurers, like the policies and services provided by the American Association of Insurance Services or Insurance Services Office. Each insurer has its own structured policy and language. Despite that fact, there are some similarities with these policies. Among them is that coverage is written on a claims-made basis. Some insurers willing to provide commercial general liability coverage, in combination with the technology errors and omissions policies, however, may require the CGL coverage to also apply on a claims-made basis. Whether that is good or bad is likely to depend on a host of factors to consider. As one might expect, technology errors and omissions policies provide coverage on a worldwide basis. What needs to be taken into consideration here, however, is what the criterion is in terms of obtaining defense. Is it necessary, for example, that the suit seeking damages be brought within the U.S., its territories, possessions or Canada, or will defense be provided regardless of where the suit is brought? These policies also differ as to how defense costs are handled; that is, some policies may provide defense in addition to limits, whereas with others, the limits for the payment of damages will be reduced by the defense costs incurred. An important point to consider is how insurers approach the particular services to be covered. In general, there are two such ways. Some insurers will take the description of the applicant’s services from the application and insert it in the appropriate part of the Declarations reserved for that purpose. Other insurers simply define the nature of their services. An insurer, for example, may define the nature of the services covered by defining the term “covered business activity,” or “technology services.” Whatever approach is taken, applicants for technology errors and omissions insurance need to be careful that the policy language is clear in pinpointing the nature of the services offered by the applicant. The core of confusion Producers looking for a niche have a golden opportunity here, if they: (1) have a thorough understanding of the nuances of e-commerce, (2) understand their insureds’ needs, and (3) have insurers that are willing to provide the coverages required. Unless producers are knowledge-able about an insured’s technology liability exposures and know the nature of the coverages that need to be purchased, it might be in their best interests not to recommend any particular policy, but to merely serve as the conduit between an entity that needs the coverages and an insurer willing to provide it. The reason for this caveat is that, based on a review of some policies and their promotional materials, they produce mixed signals as to the extent coverage is to apply. For example, an insurer may promote its policy as a professional liability one for technology companies but then limit its coverage to negligent acts, errors or omissions, rather than to any acts, errors or omissions. In fact, the promotional material may even label the policy as a professional one and then specifically state that coverage applies for negligent acts, errors or omissions. For some people, this may appear to be a distinction without a difference, until their claim is denied and then they have a different perspective on policy provisions. In actuality, there are significant differences between a policy written to cover an intentional act and a negligent act. In fact, this very subject was addressed in the July 2005 issue of this column in an article titled “A Subtle Shift.” The bottom-line difference, for purposes here, is that a policy limiting coverage to negligent or unintentional acts is not likely to cover intentional acts or torts. It is not unusual for entities involved in providing services, technological or not, to be sued for breach of contract. Insureds should be prepared for some disputes here, because many insurers will attempt to deny defense and coverage based on breach of contract allegations. The common explanation of insurers is that breach of contract is brought about by an intentional act. Some insurers have found out, however, that breach of contract can also come about through unintentional acts or negligence. Some product development people of insurers also appear to be confused about the actual language they produce. If, for example, a policy’s coverage is limited to negligent or unintentional acts, why is it necessary to exclude an intentional act or omission? How, too, can a policy provide coverage for certain defined personal and advertising injuries, which are intentional torts, when a policy’s insuring agreement is limited to negligent or unintentional torts? Some good, well-thought-out policies providing technology errors and omissions coverages no doubt are available. It is a matter of determining which insurers are providing them and with policy language that does not create a minefield of reasons for which claims people can deny coverage. Basic problem area Even before one gets to the step where a technology errors and omissions policy is reviewed to determine its acceptability, one needs to understand the interaction between such policy and the commercial general liability form. A caveat here: No one should automatically assume that a technology errors and omissions liability policy, whether issued by the same insurer as the CGL form or not, will be a “gap-filler.” To make this point clear, let’s assume that an insured is in the business of Web site design. The appropriate exclusion issued on the CGL policy is CG 22 99 12 04 Professional Liability Exclusion - Web Site Designers. This endorsement states that no coverage applies to bodily injury or property damage arising out of any act, error or omission with respect to Web site design or consultant services. With this exclusionary endorsement taking away coverage for any act, and a technology errors and omissions liability policy limited to negligent acts, there is a gap in coverage for intentional act coverage. This is not an insignificant difference! As mentioned, claims people will jump on this when the opportunity arises. One more example is the person or organization that provides Internet services. Here the CGL policy is likely to be amended with CG 22 98 12 04 Exclusion - Internet Service Providers and Internet Access Providers Errors and Omissions. When this is issued, it precludes coverage for bodily injury and property damage arising out of an error, omission, defect or deficiency in any evaluation, consultation, advice, etc., having to do with Internet service or access providers. Interestingly, conspicuous by its absence is any reference in this exclusion to “any act” or even to “negligent act.” With a technology errors and omissions liability policy limiting its coverage to negligent act, error or omission, there still may be room to argue that the CGL policy applies, when the allegation is an intentional act. In fact, this argument may be certain to materialize, given that most E&O policies, which cover negligent acts, errors or omissions, exclude bodily injury, property damage and personal and advertising injury claims. One has to wonder if product development people actually know the difference between E&O liability policies and CGL policies. The reason is that the CGL policy is the vehicle to provide liability coverage for injury or damage, whereas the E&O policy was originally intended to cover liability for economic damages not based on injury or damage. Damages based on making the wrong decision is one example. Somehow during the evolution of insurance, insurers unfortunately began to mistakenly exclude injury and damage along with their E&O exclusions. To refer to these E&O policies as professional in nature compounds the confusion, because professional policies traditionally have covered not only economic damages based on intentional or unintentional acts but also damages based on injury or damage. Until insurers come to grips with the confusion they are creating and correct the matter, problems will grow to the point where they will be resolved only after generating a lot of argument at the expense of many people. What CGL insurers should do if they want to eliminate the type of coverage offered by E&O liability policies, and nothing more, is to draft exclusionary endorsements that are prefaced with the words: “Except with respect to bodily injury, property damage or personal and advertising injury …” What insurers also should do is to call a spade a spade. In other words, cease and desist from calling an E&O liability policy a professional liability policy when, in fact, that is not the case. Once insurers get their act together, it will be a lot easier for producers and others to get a clear picture of the needs of persons and organizations with e-commerce exposures and be able to assist such entities in the coverages they need without the built-in landmines that persist today. * |
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