By Donald S. Malecki, CPCU

When it comes to prescribing coverages for new clients in the small to medium-sized categories, it is relatively easy to suggest most of the coverages for their basic needs. Producers can do this almost methodically without any checklist beginning with the general categories of property, liability, fidelity/crime/fiduciary, auto, and workers compensation/employers liability.

Refining the coverages within these categories may require a checklist so as not to miss anything. From a property insurance perspective, for example, the question needs to be asked whether coverage is required on real property and/or personal property, on equipment, mobile and stationary, a boiler or other heating object.

Publications that can serve as aids are available to producers and others. One of these publications, Coverages Applicable, has long been available from the Rough Notes Company. Other publications also offer checklists according to the nature of the business, such as auto dealers, contractors, day care centers, food stores, motels, nonprofit organizations, and restaurants.

Closer inspection of these checklists will reveal some repetitiveness to them from the standpoint of the general categories of coverages required to fulfill an entity's basic insurance needs.

Gray areas of coverage

Who needs errors and omissions (E&O) coverage and the reason(s) it should be considered by a prospective client is sometimes overlooked, except in cases where this coverage is well-known to apply, such as insurance agents and consultants, real estate agents, and travel agents.

Errors and omissions coverage is not to be confused with professional liability coverage even though it often is. At one time, it was understood that professional liability was a term reserved for professionals or, in other words, with persons having specialized skills such as lawyers and physicians who require broad coverage for their acts, errors or omissions.

The term has become muddled over the years, however. Witness, for example, the reference to some policies sold by insurers to municipalities referred to as law enforcement professional liability, volunteer firefighters professional, or some policies sold to insurance agents and brokers referred to as agents professional liability. This is not to put down law enforcement, volunteer firefighter personnel or insurance agents, but the kind of special skill required by these persons is certainly not the same as what is required of physicians and kindred occupations.

It is not how the insurer labels its policies that matters but, instead, what the policies actually say. Rest assured, many professional liability policies are in actuality errors and omissions policies covering the mistakes made in business judgment that cause harm to others. However, the reverse seldom, if ever, is true--that is, where an error or omission policy is actually a professional liability policy.

Almost always excluded under these E&O policies are damages because of bodily injury, personal injury, advertising injury and property damage. There are two reasons for these exclusions. The first is that those types of damages are intended to be covered by a commercial general liability policy. The second reason is that an E&O is intended to cover damages for errors in business judgment not resulting in property damage.

Red flags

The Insurance Marketplace, another publication of the Rough Notes Company, is an excellent source for determining many of the people who are in need of both professional liability and errors and omissions policies. In fact, this publication lists many of those who need professional liability and those requiring E&O coverage.

Anyone who is a consultant, regardless of field, would likely be a candidate for an E&O liability policy. Being a consultant of whatever specialty, in fact, is a red flag signaling the need for E&O coverage, simply because consultants give opinions and they can make mistakes in their judgment. Yet, for whatever the reason, coverage often is not purchased and attempts are made to collect under some other policy.

A case in point is Ray v. Valley Forge Insurance Company, 92 Cal. Rptr.2d 473 (Cal. App. 2 Dist. 1999), where a roofing consultant, formerly a roofing contractor, sued the insurer that had issued him a CGL policy after the insurer refused to defend and indemnify because he gave a home owners association bad advice on re-roofing materials.

The home owners association alleged that the consultant represented himself to be a roofing consultant qualified to recommend, specify and approve material to be used in re-roofing the buildings in the complex and that the material he specified and approved was suitable for the buildings. The gist of the home owners association's allegations was that the consultant was a professional roofing consultant who rendered bad advice.

The complaint also alleged that the consultant acted deliberately as a professional consultant to provide advice. In the final analysis, the court sided with the insurer holding that the consultant's CGL policy based coverage on an occurrence and the consultant's conduct could not be labeled as such.

What may not be readily obvious but should be of concern here is that almost every contractor could be a candidate for an E&O policy whether he/she officially practices as consultant or not. Or to say it another way, one does not have to be employed as a consultant to qualify for E&O coverage--it is the actions of the person that are important. The problem will be in convincing clients that such a coverage needs to be considered, given that many insureds like the idea of spending as little as possible for insurance, while expecting the very best of coverage following claim.

Another rather obvious candidate for E&O coverage is a printer who can make mistakes causing others to sustain financial loss not labeled as property damage. Printers going without a regular E&O policy should not be too much of a problem because some insurers offer special package policies designed for printers and publishers that include coverage for errors and omissions.

For whatever reason, however, a printer may not be offered this package, may not qualify for it, or may reject it because of cost. When any one of these is the reason, it could be a big problem for printers to obtain coverage for their mistakes under a commercial general liability policy in the absence of property damage. There may be ways to overcome CGL policy obstacles, particularly the "impaired property" exclusion in certain fact patterns.

However, many of those who have tried to obtain coverage under CGL policies have not been successful, as was pointed out earlier, including the printer in the case of Wisconsin Label Corporation v. Northbrook Property & Casualty Company, 586 N.W. 2d 29 (Wis. App. 1998).

This was a somewhat complicated case, but the client here wanted to offer a promotional package consisting of two boxes wrapped together in a single package where the consumer pays for one and receives the other without cost. To do this, the bar codes were to be completely covered and replaced with a new label. When scanned, the new label was to reflect the price of only one of the packages.

After the promotional campaign began, Wal-Mart claimed that, on a number of promotional packages, the old bar codes were not properly covered. As a result, Wal-Mart claimed it had scanned many of the promotional packages at an incorrect, lower price and made a claim for $200,000.

When the insured tendered this claim to its CGL insurer, it was denied because no property damage had occurred and because even if property damage had occurred, the impaired property exclusion would have precluded coverage. The conclusion of the trial court and court of appeals was that mislabeling of a client's promotional products was not covered under the CGL policy.

Seeking prospects

If one refers to the table of contents of the The Insurance Marketplace, he/she will note more than 100 different types of candidates for E&O liability coverage. One should not conclude that this list is exhaustive.

This publication serves as a tool in giving producers ideas about approaching the businesses listed for purposes of selling E&O coverage. As was pointed out earlier, producers need to keep focused on the idea that virtually every business is a candidate for E&O coverage if the business can make a mistake in judgment that affects the financial well-being of other persons or organizations.

The point to keep in mind is this: Can the mistake in business judgment result in damages that would not be considered to be "property damage" as commonly defined in general liability policies? If the answer is yes, the prospect is a candidate. What would make the sales pitch unnecessary is when the prospect already maintains a directors and officers liability (D&O) policy or a similar policy designed for general partnerships.

Perhaps someone should have asked this question of a firm that took inventory of contents and was required to certify the quantity and value of another entity's inventory. This firm was sued in the case of Fireman's Fund Insurance Co. v. National Bank Cooperatives, 103 F. 3rd 888 (U.S. Ct. App. 9th Cir. 1996) because the certifications made on inventory were incorrect and, to make matters worse, a bank extended credit on these erroneous certifications--to its detriment.

The firm, accused of making these misrepresentations not only went bankrupt but also found out that its CGL policy did not apply because of the lack of property damage as defined in the policy.

Caveat

Producers need to be careful not to go overboard in their approach to selling E&O coverage. It is safe to say that most E&O liability policies limit coverage to "negligent acts, errors or omissions." In other words, intentional acts are not covered. This is unlike some of the better professional liability policies that encompass coverage for intentional acts (including D&O liability policies). In fact, this is one of the major distinctions between professional liability and errors and omissions liability coverages, but even this distinction has become muddled.

There is a tremendous market potential for E&O liability coverage which, despite its limitations, can go a long way in aiding prospects who get sued and do not have the proper insurance to rely on. Whether there is a special policy for the prospect in question is seldom a concern, at least to insurers. The reason is that some insurers' E&O policies are drafted in such a way that one policy can accommodate virtually every type of business organization requiring it. *