Two sons had bought out their father’s interest in a clothing manufacturer and hired a business consultant to make it more profitable. The consultant felt pressured to make some dramatic changes, so he recommended a 20 percent cut in staff and a major product‐marketing effort, which the owners immediately acted upon. The improved marketing proved too effective for the slimmer company. A host of large orders were taken, but the remaining workers were unable to fill the orders within the promised time frame. In addition, the business had laid off its inspectors, so defective product was shipped out. Between the delays and the quality issues, the company got a black eye across the industry and orders stopped coming. Within a year, revenue was down almost 50 percent, and the business consultant was sued for loss of company income from his negligence.
A travel agent was handling the honeymoon trip for a young, wealthy couple. He booked them into an attractive local hotel in Mexico, where they were having a wonderful time – until they were robbed at gunpoint of the wife’s $70,000 engagement ring. The couple alleged the travel agent should have warned them of the dangers of the area and not booked them into that hotel. They sued him for the value of the ring and the cost of their honeymoon‐turned‐nightmare.
Independent Public Claims Adjuster
A South Carolina woman was heartbroken when fire destroyed part of her historic home, and she quickly hired an independent public claims adjuster to negotiate with her insurance company. Negotiations proceeded at a snail’s pace, as the homeowner repeatedly called the adjuster to identify additional items of property that were lost or damaged in the fire. She was upset that the unusual trim around her ceiling could not be replicated and suspected that her adjuster was more interested in
maintaining a working relationship with the carrier than getting her a bigger settlement. Meanwhile, she refused to allow her roof to be patched to prevent further damage. The final settlement, reached
two years later, was close to the policy limits and did not address the additional damage caused by the open roof. She sued the independent adjuster and lost, but the adjuster’s attorney’s fees were significant.
Human Resource Consultant
The company was expanding and its owners hired a human resource consultant to create an employee‐benefits plan to encourage employee retention. The consultant came up with a plan whose costs were projected to be well within the company’s budget, and it was adopted. The consultant didn’t anticipate the steep rise in the cost of medical insurance or the dive taken by the stocks that were to be used to offset some of the plan’s costs. When the benefits actually cost the company several times the consultant’s projections, the company sued the consultant for the extra costs.
Questions to Ask
Do you have prior coverage? If so, may I have a copy of your policy?
Viewing a client’s earlier policies provides an agent with a price to target and a broker with a quick idea of whether he can locate competitive coverage. However, miscellaneous E&O is almost always written as a claims-made policy, so there is an even more important reason to get a copy of the policy; unless an agent has proof of the prior coverage and can match the coverage and retro dates, the policy will likely be written for “no past acts,” and provide no protection for claims against past services reported after the new policy takes effect.
Are you aware of the time constraints for reporting an incident under an E&O policy?
Failing to thoroughly explain how a claims-made policy works could put an insurance agent’s own professional liability on the line. Agents need to be sure their clients are familiar with the reporting time frame for E&O claims and that clients understand why they may need to purchase a retro date for continuous coverage, or an extended reporting period (tail) endorsement to protect themselves from claims filed months or even years after performing a professional service. Of course, it also is important to go over the rest of the policy.
Are you planning to cease operations in the near future?
Closing up shop or merging with another business doesn’t end liability. Just because a client hasn’t been sued for completed work doesn’t mean he’s permanently off the hook. Claims from professional services often take years to develop. A bookkeeping service can files taxes for a client company and hear nothing for three years, until the IRS audits the taxes, determines taxes were underpaid and imposes a stiff penalty on the bookkeeper’s client. An agent can request an insurance carrier provide an extended reporting period to continue coverage for past services after the business closes, but this must be requested within the allotted timeframe outlined within the terms of the policy.
Would you fill out this supplemental application?
Miscellaneous E&O addresses more than 300 different categories of professionals, including business consultants, travel agents, medical billers, claims adjusters and franchisers. To hone in on the most relevant information, markets have created between 30 to 50 different supplemental applications tailored specifically to the various professions. The appropriate supplemental application along with the main form application enables the agent to obtain appropriate, often broader coverage and sometimes secure a credit for a client’s good loss-control practices. In addition, a broker usually can provide ballpark pricing and coverage limits from a supplemental app, which helps the agent manage their client expectations.
May I have copies of the resumes for key employees and principals?
Information on a resume often affects how underwriters see a risk and whether they are comfortable offering a low deductible or more favorable terms or rate. A newly established business may improve its rating and terms when the resumes submitted with the application indicate an experienced management team and staff.
Ask an Expert
Because Miscellaneous E&O is so broad, what is the best way for a retail broker or agent to explain it to their clients?
Miscellaneous E&O coverage is ideal for any organization that provides a knowledge-based service to an individual or entity for a fee. When mistakes occur, such as overlooking a critical piece of information or misstating a fact, Miscellaneous E&O coverage delivers protection for financial harm suffered by your client. Coverage typically includes errors, omissions and negligence during the rendering of professional services. In addition, civil liability can be extended to cover libel, slander, privacy infringements, and intellectual property infringements.
Would Miscellaneous E&O coverage be most applicable to large, multinational corporations who offer their clients highly specialized services?
While Miscellaneous E&O would certainly be applicable to a highly specialized global organization, it applies to companies of all sizes. Take for example the story of a marketing agency that issued a direct mail campaign to the incorrect target audience. The agency was sued for negligence and incurred defense, reprinting, and settlement costs of nearly $1 million. As a small organization, the lawsuit sent the agency into bankruptcy. Miscellaneous E&O coverage would have covered these costs and allowed the firm to remain solvent.
Are there certain industries where Miscellaneous E&O coverage is more of a necessity?
Since the Great Recession the United States has been moving from manufacturing to a knowledge based economy. Industries such as technology, energy, and medical have experienced great growth with consulting services and new ventures emerging from all sectors. These start-up entities inherently create new risks and liabilities. Miscellaneous E&O can help to protect these entrepreneurs to ensure their businesses remain sustainable for the long haul.