WRONGFUL ACTS AND PROFESSIONAL LIABILITY INSURANCE
To be covered, how wrongful can they be, and how professional do they have to be?
[A]s we see in general liability insurance,
it’s important to establish a distinction between
an intentional act and the intent to create a loss … .
By Joseph S. Harrington, CPCU
Independent insurance agents and brokers have no greater occasion to empathize with their client than when placing professional liability coverage.
Sure, agencies and brokerages also carry commercial auto and general liability insurance, but those are usually for incidental exposures. But, as with other licensed professionals, a claim alleging an error or omission on their part strikes directly at producers’ efforts to position themselves as reliable protectors of the public.
So, for themselves and their clients, agents and brokers are well-advised to develop a comprehensive understanding of what constitutes a “wrongful act” eligible for coverage under each policy they buy or sell for covering professional liability, otherwise known as “errors and omissions” (E&O) insurance.
That’s no easy task, considering that the web portal Law Insider alone provides 965 samples of how those two words are defined and qualified in professional and management liability policies, which are not standardized nearly to the extent as policies covering auto liability, general liability, and workers compensation.
To cite but one example provided by Law Insider, a major U.S. carrier defined wrongful act in a fairly conventional manner as “any actual or alleged negligent act, error or omission in the actual rendering of professional services to others arising out of your operations described in this endorsement … .” For purposes of coverage, however, that simple definition is qualified by 23 exclusions, some of them with multiple parts.
Questions to ask
For themselves and for their clients, insurance producers need a common frame of reference for evaluating different professional liability policy forms. A series of questions regarding the effective definition of “wrongful act” can help in this regard.
Does a covered act have to be strictly professional? The entire concept of professional liability is based on the idea that individuals with specialized knowledge have a duty to employ that knowledge with competence and care on behalf of people who do not have the same specialized training.
An insured under a professional liability policy could be a practice or an individual practitioner. In either case, but more so in the former, the insured will engage with clients in both professional and non-professional transactions.
Wording that restricts coverage to the rendering or failure to render professional judgments may, in effect, exclude losses from other causes directly related to the service rendered but not requiring professional certification or licensing on their own.
What degree of intentionality is covered? Most actions are intentional, and a lot of omissions are, too. Yet one finds professional liability policies that will exclude losses caused by “criminal, dishonest, fraudulent, or intentional act or omission[s].”
One can certainly see why violations of law would not be covered; the same goes for dishonest and fraudulent acts, presuming it can be proved they were dishonest and fraudulent.
But, as we see in general liability insurance, it’s important to establish a distinction between an intentional act and the intent to create a loss or, in this case, an intent not to meet a required standard of competency and care.
Under the wording above, the insured bears the burden of proving that a loss was not intentional, even though it resulted from an act undertaken intentionally. Even that may not work to win coverage in a court committed to strict observance of the policy language. While other courts will find coverage, lest the insurance become illusory, do you want to rely on judicial interpretations or plain policy language?
Does the policy exclude coverage for “gross” or “wanton” negligence? The point of professional liability insurance is to cover losses to others from the insured’s negligent errors and omissions, plus vicarious liability the insured may incur for acts of others under his or her supervision.
Apart from excluding coverage for any wrongful acts undertaken knowingly and intentionally, some policies also exclude coverage for “gross” or “wanton” negligence. Those terms are rarely defined in policies, but they are commonly considered to refer to conduct that displays a complete disregard for an expected standard of care or the interests of the insured’s client[s].
What distinguishes gross or wanton negligence (not covered) from simple negligence (covered) will depend on the circumstances of a loss and the subjective views of the parties to it.
Everything else being equal, an insured under a professional liability will be better off if it knows ahead of time how the carrier will answer these questions when a claim comes in.
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.