In order to better understand the very important Errors & Omissions field of Liability insurance, an Architects’ and Engineers Professional Liability Policy is discussed in detail. The policy language varies by occupation or specialty of the insured, but much of the wording and provisions of this policy will closely follow that of other professional E&O policies.
Similar to the discussion of the Commercial General Liability policy, each provision will be discussed and typical wording will be reviewed. The wording of the policy is a combination of policy forms offered by companies offering this type of coverage. It is not within the purpose of this text to determine if the policy form used is the “best” type available, but an attempt has been made to include some of the more appealing provisions in this discussion.
To further illustrate a Professional Liability Insurance Policy, the following format is used with a typical Architects’ and Engineers Professional Liability Insurance Policy. Under this particular policy form liability limits usually range from $100,000 to $5 million, and with deductibles range from $5,000 upwards, depending upon the size of the firm.
This particular policy, and others like it, in almost all cases, will be on a “Claims-Made” format. A statement so acknowledging this would appear at the beginning of the policy (in capital letters &/or in bold print):
“THIS IS A CLAIMS‑MADE AND REPORTED POLICY. CLAIMS MUST FIRST BE MADE AGAINST THE INSURED AND REPORTED TO THE COMPANY DURING THE POLICY PERIOD UNLESS AN EXTENDED REPORTING PERIOD APPLIES.”
One can easily see why this is a Claims-Made type of policy, i.e. claims are first made against the insured and reported to the insurance company while the policy is in effect.
“Within the body of the policy, any claim expenses paid to the insured will reduce the insurance limits.” For instance, if the policy had limits of $500,000, and claim expenses (defined later in the policy) amounted to $100,000, that would leave only $400,000 to be paid under the policy. The wording would likely be in capital letters &/or in bold print, in the beginning of the policy (to comply with many state regulations) as
“THE PAYMENT OF CLAIM EXPENSES REDUCES THE LIMITS OF INSURANCE.”
Again, in accordance with most state laws, caution has to be stressed in the beginning of the policy, that certain provisions restrict coverage – as most insurance policies do. Various provisions in this policy restrict coverage. The entire policy must be read carefully to determine the insured’s rights, duties and what is and is not covered.
The use of “first-party” nouns and pronouns used in the policy to identify parties concerned, are spelled out:
”Throughout this policy the words you and the insured’s refer to the Named Insured shown in the Declarations. The words the insurer, us, and the insurer’s refer to the Company providing this insurance (Note: in this context, the sample wording will refer to “the insured” instead of “you”, etc. The student should be familiar with insurance terminology so that they can identify “you” with “the insured”). The word “Insured” means any person or organization qualifying as such under SECTION II. Refer to SECTION II ‑DEFINITIONS for the special meaning of other words and phrases that appear in bold print.”
The Insuring Clause is relatively standard is most insurance contracts. Note that this policy has a deductible and this provision states that the Deductible has to be paid before the company will pay. “In consideration of the premium charged, the undertaking of the Named Insured to pay the Deductible (in other words, the Insured must pay the Deductible first), if any, and in reliance upon the statements in the application, and subject to the Limit of Liability of this insurance as set forth in the Declarations, and the Exclusions, Conditions and other terms of this Policy, the Company agrees with the Named Insured as follows:”
This Insurance Agreement states rather succinctly that the company will pay for the damages assessed against the insured, that the insured is legally – NOTE LEGALLY-obligated to pay. Of course, in keeping with the policy form, the claims must have occurred during the policy period. The Extended Claims Reporting Period will be discussed later in this policy.
“The insurer will pay on behalf of the Insured all sums in excess of the Deductible noted in the Declarations that the insured is legally obligated to pay as Damages because of Claims first made against you during the Policy Period, and reported to us during the Policy Period or the Extended Claims Reporting Period if applicable.
At this point there are typical “Provided that” statements, which narrows and more closely defines and identifies the claims that would be paid under this policy:
The insurer has the right to defend with the counsel of their choice, any claims arising under this policy. After all, it is THEIR money. Claim expenses reduce the Limits of Liability of the policy. (This is mentioned so often in the policy that one must imagine that insurance companies have had problems with their insured’s over who will pay for claims expenses in the past)
“The insurer has the right and duty to defend, with counsel of the insurer’s choice, any Claim seeking Damages to which this insurance applies. Claim Expenses reduce the applicable Limit of Liability identified in the Declarations as described in Section VI Limits of Liability. The insurer’s duty to defend all Claims or pay any Claim amounts or Claim Expenses to which this insurance applies shall end when the applicable Limit of Liability has been exhausted by the payment of Claim Expenses or Damages.”
“Definitions” appear in nearly all types of insurance policies as the terminology within any policy has a special and often specific definition used only in the particular policy form. Insurance terminology has evolved through decades of use and tradition, laws, legal rulings and general usage and has come to define words specifically in the insurance tradition. It really is no wonder that insured’s complain about not understanding insurance terminology, as an example, when the simple and important term of “insured” can vary widely from policy to policy.
A. Claim means any demand made against the insured seeking Damages due to the insured’s Professional Services and alleging liability or responsibility on the insured’s part.
B. Claim Expenses means:
1. fees charged by an attorney designated by: (a) us; or (b) the insured with the insurer’s written consent, and
2. all other fees, costs and expenses resulting from the investigation, adjustment, defense of a Claim, and the premium for appeal, attachment or similar bonds; and
3. interest on the full amount of any judgment that accrues after entry of the judgment and before the insurer has paid, offered to pay, or deposited in court the amount available for the judgment under this policy; and
4. allowable expenses of $250 per day but no more than $5,000 in total for the compensation to the insured’s principals, directors, officers or employees for personally attending any legal proceeding at the insurer’s request. These allowable expenses shall be applied towards reducing the applicable Deductible amount. Claim Expenses do not include salaries or expenses of the insurer’s regular employees or officials or fees and expenses of independent adjusters retained by us.
C. Damages means the monetary amounts for which the insured may be held legally liable, including sums paid as judgments, awards, or settlements, but does not include:
1. the restitution, return, withdrawal or reduction of fees, profits or charges for services rendered or offered or any other consideration or expenses paid to the insured or by the insured for services or products; or
2. judgments or awards deemed uninsurable by law.
D. Named Insured means the person or entity designated in Item 1 of the Declarations;
E. Insured means:
1. the Named Insured ;
2. the insured’s current or former principals, partners, executive officers, directors, stockholders, trustees or employees while acting on the insured’s behalf and within the scope of their duties as such;
3. the insured’s current or former employees including leased personnel under the insured’s supervision but only for acts within the scope of their employment or lease agreement; and
4. the insured’s heirs, executors, administrators, assigns and legal representative in the event of death, incapacity or bankruptcy, but solely with respect to the liability insured herein;
5. a retired principal, partner, officer, director or employee while acting within their duties as a consultant for you;
6. any Predecessor in Interest.
F. Mediation means non‑binding intervention by a neutral third party.
G. Policy Period means the period set forth in Item 3. of the Declarations, or any shorter period resulting from a termination of this policy.
H. Predecessor in Interest means any prior entity whose assets, partners, principals or shareholders have joined the insured and whose name has been provided in the application and for whose insurance the insured is responsible by written agreement.
I. Professional Services means those services which the insured is legally qualified to perform for others in the insured’s capacity as an:
1. architect or engineer;
2. landscape architect, land surveyor or planner;
3. construction manager; or
4. as specifically described in the insurer’s application.
J. Related Wrongful Acts means Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of causally connected facts, circumstances, situations, events, transactions or causes.
K. Retroactive Date means the date on or after which any alleged or actual act, error or omission must have taken place in order to be considered for coverage under this policy, as stated in Item 4. of the Declarations. If none is shown, the retroactive date will be the effective date of the first policy issued by us to the insured.
L. Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted by any Insured or by any person for whose conduct the Insured is legally responsible in rendering or failing to render Professional Services, provided that:
(1) such error, misstatement, misleading statement, act, omission, neglect, or breach of duty occurred on or subsequent to the Retroactive Date stated in Item 4. of the Declarations and before the end of the Policy Period; and
(2) on or before the effective date of this Policy the Insured had no knowledge of circumstances involving any error, misstatement, misleading statement, act, omission, neglect, or breach of duty, which may result in a Claim.
CONSUMER APPLICATION
James Architects designed an office building. During construction, a metal beam broke its rivets because of a design flaw. The beam fell on a moving car, causing property damage to the car and direct bodily injury to the driver who lost control of the car, hitting a bus stop and injuring 3 persons waiting for a bus.
The Architect’s E&O policy would cover these injuries and property damage. Even through the falling beam did not directly hit the people in the bus stop, they would be considered as victims of a “Related Wrongful Act.”
The territory in which the policy will operate is spelled out. Many such policies will only be applicable within the United States and the company does not want to have to try and defend an insured according to the liability laws of another country with all of the expenses inherent:
“The insurance afforded by this policy applies worldwide.”
The “Exclusions” section is one of the most important sections of the policy and the one that cause the greatest customer dissatisfaction. A professional agent will always go over the Exclusions of any policy – not only Liability policies – very, very carefully with the insured to make certain that there are no misunderstandings. Too frequently, this section will not be mentioned to the policyholder, or just mentioned “in passing” because of the fear that Exclusions are “negatives: and could kill the sale, if the policyholder took exception to any of the provisions.” Unfortunately, if Exclusions are reviewed at time of claim, that is when the real difficulties arise and the agent may have to then appeal to their own E&O Liability policy!
“This policy does not apply to any Claim or Claim Expenses based upon or arising out of‑
A. any dishonest, fraudulent, criminal, intentional or malicious act, error or omission, or
(This is self-explanatory and is designed for liability policies. The “have knowledge of” section is particularly important for “pre-existing conditions”).
B. a Claim made by any Insured against any other Insured (obviously, this keeps the insurer from “being in the middle” between two or more insureds);
C. a Claim by any individual or business enterprise or its subrogees or assignees;
(1) that wholly or partially owns, operates or manages the insured; or
(2) in which the insured has an ownership interest in excess of 20 percent; or
(3) that is controlled, operated or managed by the insured; or
(4) in which the insured is an officer or director (This ensures that an insured cannot sue itself, with the insurance company footing the bill. Since most exclusions derive from unfortunate previous claims, it could be assumed that in the past, some enterprising insured sued, or attempted to sue, some firm or situation wherein the insured had a financial interest, or, perhaps, some actuary was far-seeing enough to anticipate such shenanigans…);
D. actual or alleged wrongful termination or discrimination on any basis, by the insured against any past or present employee, officer, or applicant for employment (a suit against the insured for wrongful termination or discrimination falls outside the intent of the policy – which is to insure professional decisions. Coverage for these other exposures can be obtained in another policy);
E. any obligation for which the insured or any party may be liable under any workers' compensation, unemployment compensation, employers liability, disability benefits law or under any similar law. (This exclusion also covers situations other than the professional actions of the insured);
F. conduct by an individual, corporation, or partnership of which the insured is a partner, director, officer, member or employee, that is not designated in the Declarations as a Named Insured (Similar to a previous exclusion which avoids an insured suing itself and the insurer paying the insured for claims against itself);
G. the advising, requiring, obtaining or maintaining of any form of insurance, suretyship or bond, or the failure to do so (Failing to obtain insurance can be grounds for a suit, but again, it is not within the professional actions of the insured);
H. any express warranty or guarantee (not within professional action of insured);
I. liability of others assumed by the insured under any contract or agreement, unless such liability would result by operation of law in the absence of such agreement (the insured cannot assume someone else’s liability, even if it is his brother-in-law);
J. fines, penalties, punitive or exemplary damages, including but not limited to any damages which are a multiple of compensatory damages, unless such damages arise solely out of a claim for libel and slander and payment by us is not held to be against public policy. (This is an interesting exclusion. As explained elsewhere in this text, punitive damages are usually not an insurable occurrence, as it is a penalty afforded by the courts for wrongful actions and such penalty can not be passed on to another. However, liability policies of this type will pay for certain libel and slander claims, but note that payment of these claims cannot be contrary to public policy. An oft-cited reason for insurers not paying for punitive or exemplary damages is the “against public policy” position of the insureds. Incidentally, “exemplary damages” are interchangeable with “punitive damages”);
K. any project that is insured under a project specific (“project specific” means that the policy is for a specific project or job) insurance policy, provided, however, that this exclusion shall not apply where the insured’s liability is found to be in excess of the limits of liability available under such project specific insurance policy which has been specifically included for excess coverage by endorsement to this policy (This rather confusing statement simply means that this policy is not designed to cover any liabilities arising from one specific job or project. Policies are available to cover specific jobs, or a specific job that may create unusual liabilities. Coverage may be available as an Endorsement, in which case it would be covered, of course);
L. the design or manufacture of any goods or products which are sold or supplied by you, or by others under license from you (This policy is for architects and engineers, not manufacturers or sales representatives);
M. the cost to repair or replace faulty construction workmanship or materials in any construction, erection, fabrication, installation, assembly or manufacturing process if performed or provided by you, including materials, parts or equipment furnished in connection therewith (Insurance covering these types of liability are available and are not within the purview of the professional liability policy).
Most policies of this type recognize that claims that have incurred during the policy period may not be known immediately to the insured. Therefore, provision is usually made that would cover any claims reported after the date of policy termination but occurring during the policy period. Please note that if the insured simply stops paying premiums and the policy is therefore cancelled, this extended reporting period does not apply. It would certainly be in the best interests of the agent and policyholder to make sure that when the insured no longer needs or wants the policy, the insurer be notified in writing immediately. Of course if the policy was obtained by fraud on the application, the policy would have been declared terminated “ab initio” (from the beginning).
CONSUMER APPLICATION
James Architects owns 40% of Plastic Building Products, Inc., which supplies specialized individually developed building products, made of plastic. They had purchased this firm as many of their designs use plastic decorative products and James was unable to find any manufactured locally. Therefore, he and his brother formed Plastic Building Products. James does not hold any position with Plastic Building except as a stockholder. His brother is majority stockholder and President.
One particular job used unique plastic building supplies, which was to be furnished by Plastic Building. The supplies were not used as designed, causing damage to the building for which the contractor is holding Plastic liable. Plastic is suing James as the specifications furnished by James were incorrect and as a result, Plastic has suffered damage to its reputation and is being sued by the Contractor.
In this situation, James’ E&O policy will not provide coverage against the suit, as James owns more than 20% of Plastic.
A. Automatic Extended Claims Reporting Period
If the insurer or the insured terminate or fail to renew this insurance for any reason, other than: nonpayment of premium, the insured’s failure to comply with any term and condition, fraud or material misrepresentation; the insured shall be entitled to a period of sixty (60) days from the date of policy termination to report Claims which are made against the insured prior to such termination date. This Automatic Extended Claims Reporting Period may not be canceled by us and does not require the payment of an additional premium. This Automatic Extended Claims Reporting Period shall be included within the Optional Extended Claims Reporting Period if such is purchased.
CONSUMER APPLICATION
Doug is an architect who was involved in a large project that has been completed. He had purchased an Architects’ E&O policy from Central Casualty as they have a reputation of specializing in the insuring of liability coverage on large projects. Doug usually designs large private homes, so he considers dropping Central Casualty, and taking another policy with Horizon Casualty, which is less expensive. He is justifiably concerned about dropping one liability insurer when he could still be found liable for some structural defect arising from the architectural plans. One the other hand, being a small businessman, he must watch his expenses closely.
Rather than dropping his Central Casualty liability policy – even though he was purchasing another policy from another company – it would be in his best interest to keep his existing policy with Central Casualty, until such time that it would appear he could not be liable for any further damages as a result of that particular job. It may seem that once a professional of this type has liability insurance with one company, he is pretty well “stuck” with the policy to be safe. Of course, in this case he has an additional 60 days of Extended Reporting coverage. Remember that this is a claims-made form. If nothing else, an insured of a policy of this type should not take the cancellation or changing of policies or insurers lightly!
B. Optional Extended Claims Reporting Period
(An Optional Claims Reporting Period may be obtained by the payment of additional premium, as outlined below. Please note that non-payment of premium will not allow the insured [former insured] to even purchase an additional reporting period).
“If the insured does not renew or replace this insurance, or if the insurer cancels or refuses to renew this policy for reasons other than the non‑payment of premium or Deductible, or non‑compliance with the terms and conditions of this policy; upon the payment of an additional premium, the insured shall have the option to extend the period by which a Claim can be made against the insured and reported to the insurance company.”
(At this point, some discussion is in order. Note that this Optional provision actually renews the policy so that any claims that arise or have arisen during the original policy period, will be covered. If the insured simply dropped the policy and then obtained another policy, the new policy would not cover any claims that occurred prior to the effective date of the new policy. Therefore the insured must determine how long a “tail” [the length of time that claims that occurred but were not reported] is needed).
The premium for the Optional Extended Claims Reporting Period shall be determined by charging
(1) 100% of the annual premium for twelve (12) months,
(2) 150% for twenty‑four (24) months, or
(3) 200% for thirty‑six (36) months. The purchase of an Optional Extended Claims Reporting Period shall be endorsed herein. The insured’s right to purchase the Optional Extended Claims Reporting Period must be exercised by notice in writing not later than thirty (30) days after the cancellation or termination date of this Policy. Effective notice must indicate the total Optional Extended Claims Reporting Period desired AND MUST INCLUDE PAYMENT OF PREMIUM FOR SUCH PERIOD. If such notice and the premium are not mailed to us within thirty (30) days, then the insured shall not at a later date be entitled to purchase an Optional Extended Claims Reporting Period. (The purpose of this part of the provision is obviously to not allow a former insured to wait for an extended period of time, and then when hit with a lawsuit not previously reported, then apply for the extended coverage. Trying to defend a lawsuit after a period of time has passed increases the difficulty of a successful defense.)
At the commencement of any Optional Extended Claims Reporting Period, the entire premium therefore shall be deemed earned, and in the event the insured terminates the Optional Extended Claims Reporting Period before its term for any reason, the insurer shall not be obligated to return to the insured any portion of the premium. (This part of the Optional period provision seems rather strict – if the insured decides that he doesn’t need the coverage any longer, he will not receive any unearned premium.)
The fact that the period during which Claims can be made against the insured and reported to us is extended by virtue of the Optional Extended Claims Reporting Period shall not in any way increase the Limits of Liability of this policy. The insurer’s liability shall further be limited to cover only those Claims or Claim Expenses which arise out of the insured’s providing or failure to have provided Professional Services prior to the expiration date of the Policy Period or any earlier termination date, if applicable, and prior to the Optional Extended Claims Reporting Period.
(Note the portion in Italics. It must be made clear at this point that even with a purchase of Extended Claims Reporting Period, the claims that will be covered must have occurred prior to the expiration date of the original policy and prior to the date that the Optional Extended Claims Reporting Period was purchased. Note, however, that the premium charged is 100% of the annual premium of the entire original policy. The reason that the premiums would be so high even though the benefit period has been restricted, is called “anti-selection”, as the insurer can be “selected against” as a disproportionate number of insureds would purchase the optional coverage – those who would be in a position to know or suspect that a claim may arise from past activities.)
The “Limits of Liability” are discussed in detail. Again, many policies would state that the claims expenses will reduce the limits of liability.
“ LIMITS OF LIABILITY: NOTE: CLAIM EXPENSES ARE INCLUDED WITHIN, AND WILL REDUCE, THE LIMITS OF LIABILITY.”
F Note that there are limits of liability for each claim, and an aggregate limit of liability.
A. Each Claim Limit of Liability - The insurer’s liability for Damages and Claim Expenses for each Claim shall not exceed the amount stated in the Declarations as the “Each Claim Limit of Liability.”
B. Aggregate Limit of Liability Each Policy Period - Subject to paragraph A. above, the insurer’s liability as a result of all Claims for Damages and Claim Expenses shall not exceed the amount stated in the Declarations as “Aggregate Limit of Liability Each Policy Period” and the Optional Extended Claims Reporting Period, if purchased.
C. Deductible - The Deductible amount as stated in the Declarations shall be paid by the insured and shall be applicable to each Claim and shall include all Damages and Claim Expenses up to the Deductible amount for each Claim. (NOTE: This is a “per occurrence” deductible, i.e. for each claim, the deductible must be paid by the policyholder. This is common on insurance policies where claims are normally experienced infrequently, as opposed to those policies where claims are frequent [such as health insurance policies]).
The insured’s total Deductible payments, in respect to each Claim shall not exceed the Deductible amount stated in the Declarations. The insurer may from time to time advance payments for Damages and Claim Expenses within the Deductible. Any amounts first paid by us within the Deductible shall, upon written demand by us, be paid by the insured within thirty (30) days. This basically means that if the insurer pays a claims amount and the deductible has not been paid by the insured, the insured agrees to pay the deductible within 30 days to the insurer. This is typical as a settlement for a claim will generally be in a lump sum and if the deductible had to be paid by the insured, the claim settlement would require two separate checks – one from the insured to satisfy the deductible, and the other from the insurer. It is better for all parties to make a single payment when possible.
D. Multiple Insureds, Claims and Claimants (Provisions are usually made, as follows, wherein claims arising out of one act will be treated as one act, etc.)
(1) Two or more Claims arising out of the same Wrongful Act or Related Wrongful Acts shall be treated as a single Claim and shall be considered first made at the earlier of the following times:
(a) the time at which the earliest Claim involving the same Wrongful Act or Related Wrongful Acts is first made, or
(b) the time at which the Claim involving the same Wrongful Act or Related Wrongful Acts is deemed to have been first made pursuant to policy provisions.
(2) The inclusion of more than one Insured in the making of a single Claim, the bringing of more than one Claim regarding the same Wrongful Act or Related Wrongful Acts or the making of a Claim by more than one person or organization shall not increase the Limit of Liability. (It will be noted that the policy also very sensitive about the limits of liability. The insured purchases a specified limit of liability, both single claim and aggregate, and regardless of what happens, these limits will be upheld.)
E. Mediation – (Mediation is the normal method of resolve differences in resolving claims. Since the insurer will not have large legal fees for court costs, the insurer is induced to agree to mediation by reducing the deductible.) If the insurer and the insured agree to use mediation to resolve a Claim brought against the insured and if such Claim is resolved thereby, the Deductible stated in the Declarations shall be reduced by 50% for such Claim subject to a maximum reduction of $20,000. Deductible payments made prior to the mediation will be reimbursed within 30 days of the resolution of the Claim.
CONSUMER APPLICATION
James Architects is being sued by United Baldwin, Inc. for design flaws in their new home office building. James E&O carrier, Magnificent Casualty is notified and appoints an attorney to represent James. United is suing for $1 million, the aggregate limit of James E&O policy. James is hoping that his situation can be pleaded in front of a jury, as he feels his reputation has been sullied, and by presenting his case he can clear his name and firm’s reputation. Further, United has had some business problems lately, and its business reputation is not very good.
Magnificent determines that in order to contest this suit; legal fees could easily reach $150,000. Even if they were able to have the amount awarded for less than $1 million, with the legal fees it probably will be a maximum claim anyway. They, too, are aware of United’s reputation.
United’s attorneys are agreeable to submitting to mediation as they do not want additional publicity at this time.
This is an excellent time to use mediation, as it would appear to be in the best interests of both parties. It is quite possible that Magnificent could pay considerably less than $1 million, and the possibility exits that the mediator may find for James.
James is not too happy with this situation, but under the terms of the policy, he must comply. However his deductible would be cut in half (or $20,000).
A separate provision is included which states that if a claim is suspected and reported to the insurer, the date of reporting will govern. This is important for claims investigation purposes and the costs affiliated with it. It simply behooves the insured to notify the insurer of any situation that MAY ARISE, and not necessarily of a claim being filed against the insured.
A. Notice of Circumstance - if during the Policy Period the insured becomes aware of a circumstance from which a Claim is reasonably anticipated, and if during the Policy Period the insured gives notice to the insurer of‑
1. the act, error or omission;
2. the Damages which has or may result from such act, error or omission; and
3. how and when the insured first became aware of such act, error or omission; then any Claim, for which coverage is provided by this policy, that may be made against the insured arising out of such act, error or omissions, shall be deemed for the purposes of this insurance to have been made on the date on which the notice was given to the insurance company. Any costs associated with the investigation of a circumstance prior to a Claim being made will not be considered Claim Expenses.
CONSUMER APPLICATION
Playground Equipment Corp. provided the playground equipment for the Northside Elementary School. An employee of Playground reported to his foreman that one of the swings had broken and had injured 3 children. Playground’s attorney was alerted and immediately went to the school and photographed the swing set, interviewed the playground supervisor, and checked with the emergency room at the hospital.
The parents did not immediately file suit against Playground (or the school), waiting to find the extent of the children’s injuries before they initiated suit. When the lawsuit was eventually filed, Playground filed claims with the insurer for claims expenses, including the attorney’s initial investigation. Even though the rapid action of the attorney undoubtedly reduced the amount of the claim, as the school and parents were impressed that Playground would act so rapidly and seemed to care for the injured children, the policy would not pay for any investigative action that occurred before the claim is filed.
The Claims Provisions outline what an insured must do when a claim arises, necessary filing of forms, cooperation in investigating the claim, and the obtaining of counsel.
A. Notice of Claim -In the event of a Claim, prompt notice containing particulars sufficient to identify the insured or any Insured involved and reasonably obtainable information with respect to time, place and circumstances, and the names and addresses of any injured parties and of available witnesses, shall be given by or for the insured to us. In the event of oral notice, the insured agrees to furnish a written notice and send us copies of all demands or legal documents as soon as possible. Written notice must be provided to us no later than 60 days after the expiration or termination of the policy. The insured’s knowledge of Claim shall be deemed to have occurred when a principal, partner, director, or executive officer first learned of the Claim. (Point to keep in mind, particularly where there is a partnership or where there are remote locations. If one of the key persons receives notice of a claim – or has grounds to suspect that a claim will be filed – they should immediately notify the insurance company and all others that may be brought into the claim). All Claims are to be reported to the Insurance Company at their home office.
B. Claims Expenses -No costs, charges or related Claims Expenses shall be incurred without the insurer’s written consent which shall not be unreasonably withheld. The insurer shall have the right and the duty to designate legal counsel for the investigation, defense or settlement of a Claim. The insurer will not settle or compromise any Claim without the insured’s consent. The insured shall do nothing to prejudice the insurer’s rights under this policy nor shall the insured admit liability or settle any Claim without the insurers written consent. If the insured refuses to consent to any settlement or compromise recommended by us involving any part of the insurer’s limits of liability and acceptable to the claimant, and the insured elects to contest the Claim, suit or proceeding, then the insurer’s liability shall not exceed the amount which the insurer would have paid for Damages and Claim Expenses at the time the Claim or suit or proceeding could have been settled or compromised. (Important point – situations may arise whereby a settlement of a claim can cast reflections on the professionalism of the insured, and the reputation of the insured is more important to the insured, than the agreeing to a settlement. A settlement, whether it so states or not, will in all likelihood, reflect adversely on the person named in the complaint. If the insured wants to take the case to court in an effort to vindicate him/her completely, the insured could end up paying for additional court costs and possibly a higher judgement, out of their own pocket.)
C. Cooperation of Insured -The insured shall assist and cooperate with us in the investigation, settlement and defense of all Claims made against the insured and upon the insurer’s request shall authorize the release of records and other information, secure and give evidence, attend hearings and trials and obtain the location of and cooperation of witnesses.
D. Independent Counsel -In the event that the insured is entitled by law to select independent counsel to defend the insured at the Company's expense and the insured elects to select such counsel, the attorney's fees and all other litigation expenses the insurer must pay to that counsel are limited to the rates the insurer actually pay to counsel the insurer retain in the ordinary course of business in the defense of similar Claims in the community where the Claim arose or is being defended. (Forget hiring F. Lee Bailey, et al, and don’t expect the insurer to pay their fees!)
Additionally, the insurer may exercise the right to require that such counsel have certain minimum qualifications with respect to their legal competency including experience in defending Claims similar to the one pending against the insured and to require such counsel to have errors and omissions insurance coverage. As respects any such counsel, the insured agrees to require the insured’s counsel to, in a timely manner, provide us with information regarding the Claim and to respond to the insurer’s request for information regarding the Claim.
The insured may at anytime, by the insured’s signed consent, freely and fully waive the insured’s right to select independent counsel.
(The final Provision, usually called “Conditions” or similar title, is sort of a “catch-all” that specified how a policy terminates, the relationship between the insured and insurer, right to audit or inspect, etc.)
A. Action Against Us - No action shall lie against the insurer unless, as a condition precedent thereto, there shall have been full compliance with all of the terms and conditions of this policy, and both the insured’s liability and the amount of the insured’s obligations to pay has been finally determined either by judgment against the insured after an actual trial or by the insured’s written agreement with the claimant or the claimant's legal representative with the insurer’s approval. (What this provision says is that if the insured feels that the insurer did not perform according to the provisions of the policy, they cannot sue until everything has been settled, i.e. “The fat lady has sung.”)
Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. (This still refers to a dissatisfied Insured taking action against the insurer). No person or organization shall have any right under this policy to join us as a party to any action against the insured to determine the insured’s liability, nor shall the insurer be impleaded (fancy legal word meaning sued or prosecuted, usually generally when there are several defendants) by the insured or the insured’s legal representative.
B. Assignment - Assignment of interest under this Policy shall not bind us without the insurer’s express written consent.
C. Audit and Inspection - Solely for the insurer’s benefit, the insurer may audit or inspect the insured’s books, records and operations at any time during the Policy Period or within three years after the termination of this policy, as far as they relate to the subject matter of this policy.
D. Bankruptcy or Insolvency - The insured’s bankruptcy or insolvency shall not relieve us of the insurer’s obligations under this policy.
E. Cancellation, Non-renewal or Renewal
1. Cancellation
a. This policy may be canceled by the insured by surrender thereof to us or any of the insurer’s authorized representatives or by mailing to us written notice stating when thereafter such cancellation shall be effective.
b. If this policy has been in effect less than sixty (60) days and is not a renewal of a policy issued by us, the insurer may cancel this policy for any reason. (This allows for the insurance company to run its usual inspection reports and gives it wide latitude for cancellation. Also, this helps persistency, as if the insured cancels a professional liability policy, any replacement policy will probably have such a provision. Therefore, the insured is not 100% sure that a new policy will be issued).
c. If this policy has been in effect for sixty (60) days or more or is a renewal of a policy issued by us, this policy may not be canceled (by the insurer) except for one or more of the following reasons:
(1) Nonpayment of premium;
(2) Fraud or material misrepresentation affecting the policy;
(3) Violation of any of the terms or conditions of the policy; or
(4) substantial increase in hazard.
(Remember the problems discussed earlier with potential claims occurring just prior to the policy cancellation).
d. Written notice of cancellation shall be mailed or delivered by us to the insured at least:
(1) Fifteen (15) days prior to the effective date of cancellation, if this policy is canceled for nonpayment of premium; or
(2) Sixty (60) days prior to the effective date of cancellation, if this policy is canceled for any other reason. (Insurers just do not like to have policies cancel because of nonpayment of premium).
e. Written notice of cancellation, including the reasons for cancellation, shall be mailed or delivered to the insured at the insured’s last known mailing address.
f. The insurer shall not be held liable in any Claim or suit for Damages arising solely from failure to comply with any requirement that the reason(s) for cancellation be specified.
g. Notice of cancellation shall be sent by certified mail unless the reason for cancellation is due to nonpayment of premium, in which case notice shall be sent by certified mail or certified mailing. Delivery shall be considered to be equivalent to mailing. Proof of mailing shall be considered to be proof of notice.
h. If this policy is canceled by us, the earned premium shall be computed pro rata. If this policy is canceled by the insured, the insurer shall retain the customary short rate proportion of the premium. (Again, a little on the side of the insurer, but that is justifiable as the insurance company has the administrative cost involved in cancellation).
2. Non-renewal
a. If the insurer elect not to renew this policy the insurer will send notice at least sixty (60) days prior to expiration or anniversary unless:
(1) The insurer has manifested the insurer’s willingness to renew; or
(2) The reason for non-renewal is due to nonpayment of premium or the insured’s deductible obligations or if the insured failed to comply with any other term and condition;
(3) The insured fail to pay any advance premium required by us for renewal; or
(4) The insured has obtained replacement coverage with another insurer.
b. Written notice of non-renewal shall be mailed or delivered to the insured at the insured’s last known address. Mailing of such written notice shall be by certified mail. Proof of mailing shall be considered to be proof of notice.
3. Renewal
a. If the insurer elect to renew this policy and have the necessary information forty‑five (45) days prior to the expiration date of this policy, the insurer will confirm the insurer’s intention to renew in writing at least thirty (30) days prior to such expiration date. Such confirmation will also include the premium at which the policy will be renewed.
b. If the insurer do not comply with subsection 3. a. above, the insured will be granted renewal coverage at premiums in effect under the expiring or expired policy or at rates lawfully in effect on the expiration date, whichever is lower. Such coverage shall continue for forty‑five (45) days after the insurer confirm in writing the insured’s renewal coverage and earned premiums for these forty‑five (45) days shall not apply if the insured accepts the renewal coverage.
F. Representations – The insurance company must rely upon information supplied it by the customer and the agent. Therefore, a statement stressing the importance of accurate information is traditional. It also states that the insurance policy and official endorsements and Declaration, constitute the entire contract, which would stop an agent or anyone else, from attaching a document changing any provision in the policy. In some policies, this section is called “Entire Contract.” “By acceptance of this policy, the insured agreed that the statements in the application and its attachments are the insured’s agreements and representations, that this policy is issued in reliance upon the truth of such representations, and that this policy, its Declarations and endorsements embody all agreements existing between the insured and us relating to this insurance.”
G. Other Insurance - The insurance afforded by this policy is primary insurance, except when stated to apply in excess of or contingent upon the absence of other insurance. When this insurance is primary and the insured has other insurance, which is stated to be applicable to the loss on an excess basis, the amount of the insurer’s liability under this policy shall not be reduced by the existence of such insurance.
When both this insurance and other insurance apply to the loss on the same basis, whether primary, excess, or contingent, the insurer shall not be liable under this policy for a greater proportion of the loss than that stated in the Declarations or the following contribution provision; whichever is lower:
a) Contribution by Equal Shares ‑ If all of such other valid and collectible insurance provides for contribution by equal shares, the insurer will follow this method also. Under this approach each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.
1. Because claims are first made against the insured and reported to the insurance company while the policy is in effect. Therefore, this is a
A. Reported Claims policy.
B. Claims Made policy.
C. Non-notification Claims type of policy.
D. Blanket Coverage.
2. Duane’s E&O policy has been in force for 2 years with a policy limit of $500,000. He was sued for malpractice and his attorneys charged $150,000 in claims expenses. The claim was adjudicated against Duane for $400,000. How much will his policy pay?
A. Dune would have to come up with $50,000.
B. The entire amount of claim plus expenses.
C. $400,000.
D. $150,000.
3. Under his typical E&O policy, Claims must be reported to the insurer
A. during the policy period, unless an extended reporting period applies.
B. prior to the extended reporting period, but less than 60 days prior to policy date.
C. only during the extended reporting period.
D. whenever Duane gets around to it.
4. Under the policy definitions, Damages
A. include punitive damages or other judgements not considered insurable by law.
B. include the return of fees for services rendered.
C. are monetary amounts for which the insured may be held legally liable.
D. restitution.
5. John sues James for bodily injury. They call for non-binding intervention. Under the policy this is called
A. Mediation.
B. Non-judicial Disposal.
C. Habeas Corpus.
D. Arbitrary Decision.
6. A claim by one insured against another insured, under and E&O policy
A. will be always paid without investigation.
B. is excluded by the policy.
C. is covered but for 50% of the claims amount.
D. will be paid, but with maximum aggregate limit of twice the claims amount.
7. Joseph stops payment on his E&O policy as he is retiring and giving up his Agent’s license. For any claims that have occurred during the policy period, but not yet reported,
A. he has 60 days of coverage from date of termination, to file claims that occurred during the policy period.
B. no coverage is provided under the policy because of policy termination for nonpayment of premium.
C. the insured will be given a period of 1 year to file claims that occurred during the policy period.
D. he must file claims within 30 days after termination of the policy.
8. 30 days after purchasing an E&O policy, the insured suffers a large claim, reported immediately to the insurer.
A. The insurer has the right to cancel within 60 days for any reason, and will do so.
B. The insurer cannot cancel the policy except for fraud or misrepresentation, so the policy will be in force.
C. The insurer has the right to cancel if a claim is more than 50% of the aggregate limit
of the policy and occurs within 1 year of the policy period.
D. The insurer can always cancel after returning the unearned premium.
9. An E&O insured must leave the US for a period of 6 months for personal reasons, so he notifies the agent in the agent’s office that the policy is to be cancelled. He had paid an annual premium in advance, and had had the policy for 3 months.
A. the policy will be cancelled as of the date of his visit to the insurance agent’s office.
B. the policy will not be cancelled without written notice to the insurance company and signed by the insured.
C. the policy will be cancelled when the home office of the insurer is notified by the agent.
D. Since the policy has been cancelled after inforce for only 3 months, and assuming there are no pending claims, the policy will be cancelled ab initio and all of the premiums returned.
10. Engineering, Inc. carried both Professional E&O coverage with Ajax Insurance, and a Commercial General Liability Policy with another insurer. They file a claim that would be covered by both policies.
A. The E&O is primary, with the CGL as excess.
B. The CGL is primary, and E&O is the excess.
C. Neither Company would be liable.
D. Each insurer will pay equal amounts until its applicable limits have been reached, or
the claim has been paid, whichever comes first.
1B 2A 3A 4C 5A 6B 7B 8A 9B 10D