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The broker faces many challenges in today’s competitive insurance market, with price and coverage being important concerns. Price, however, should not be the deciding factor, especially when it comes to placing Errors and Omissions (E&O) policies.
While most insurance coverages are devised for a specific purpose with their own terms or cover-related exposures in a class, the relationship between E&O and Commercial General Liability (CGL) policies should be considered carefully in the insurance placement process.
DIFFERENTIATING THE POLICIES
E&O and CGL policies are both liability policies, but provide coverage for different exposures.
E&O policies provide coverage (generally on a claims made and reported basis) for financial loss for alleged negligent acts, errors or omissions arising out of the insured’s professional services. Defence costs are typically inside the liability limits.
CGL policies, for their part, provide coverage (on an occurrence basis) for bodily injury and property damage arising out of the insured’s business operations. Defence expenses are customarily outside the liability limits.
Claims arising from professional services are typically excluded under a CGL policy as a result of a professional services exclusion. The scope of this exclusion and the definition of professional services often vary by insurer: insurers are not obligated to follow the latest Insurance Bureau of Canada (IBC) CGL wording (IBC 2100).
The trend, however, has been to expand the professional services exclusion to exclude more classes of business and more types of services. Brokers should carefully review the exclusion to determine exactly what occupations are not covered.
The Supreme Court of Canada has provided some guidance on how CGL policies respond to claims involving professional services. In the 1977 case, Foundation of Canada Engineering Corporation v. Canadian Indemnity Corporation, the court noted that, “a general liability policy is not basically a professional liability one,” but recognized that this statement was made “without attempting to cast a mould meant to shape all future possibilities.”
As such, the court suggested that while the CGL is not intended to cover professional liability, coverage may be possible. The wordings, facts, claim demand and intent will all play a part in how the policy and the courts will respond.
INSURING A PROFESSIONAL RISK
The expansion of the professional service exclusion in the CGL coincides with an increase in new professions that differ from the traditionally recognized professionals, such as doctors, lawyers and engineers. Given the expansion of the exclusion, and the rise of new professions, brokers and underwriters must re-evaluate their traditional approach to a risk to determine whether or not a CGL policy can adequately respond to the needs of an insured and whether or not an E&O policy is required.
Canadian courts (and most in the United States) have provided some guidance as to whether or not certain exposures will be caught by a professional services exclusion, thus suggesting the need for an E&O policy. The courts, on both sides of the border, have established some principles for E&O exposures and what constitutes a professional exposure:
• professional services are those that involve specialized knowledge, skill or labour, which are primarily mental or intellectual as opposed to physical or manual; and
• the nature of the act is determinative of the professional service as opposed to the insured’s occupation or title (for example, mopping a floor does not become a professional service merely because a doctor does the mopping).
The application of these principles can be challenging. For example, while it is readily understood that doctors, lawyers and engineers should be insured under an E&O policy, what about electricians? They have specialized knowledge with a recognized course of study and also need to be licensed in most jurisdictions. Do their services meet the concept of a specialized skill such that they are providing professional services?
Notwithstanding the specialized skill, it is likely the services provided by an electrician would be primarily physical or hands-on in the completion of their work, and as such, not fall into the intellectual component. These insurance exposures would be better covered under a CGL policy, especially under the products and completed operations sections.
What about a technician working in a health clinic? In the 2009 case, Ayana v. The Skin Klinic, before Ontario’s Superior Court of Justice, a patient filed a claim after being burned during laser hair removal. Although the procedure was performed by a technician in a health clinic, it was done without a doctor’s supervision.
The court concluded that the activity engaged in was not a professional one, that the technician was not a nurse or health professional, and had not received any recognized, specialized training. This being the case, the plaintiff’s damages did not arise from professional services.
(Note that this exposure has been recognized by some insurers and some treatment services, i.e. barbers or beauticians, can be covered under a CGL policy with an amendment to the professional liability exclusion.)
Similarly, not all acts of a recognized professional will be covered under an E&O policy. A defamation claim against a lawyer for comments made outside of work, may be excluded under the E&O policy due to a personal injury exclusion. In addition, the defamatory act may not constitute a professional act even if performed by a recognized professional.
In contrast, personal injury coverage is customarily covered under a CGL policy.
The need for both an E&O policy and a CGL policy is evident in situations for businesses operated by professionals. Insurance brokers are service providers whose services will be considered to be professional services.
Claims against such insureds for losses occasioned by their advice will be excluded under their CGL policy due to the professional services exclusion, and there is a clear need for an E&O policy.
Yet if a kitchen sink in an insurance broker’s office overflows and damages an adjacent office, it is the CGL policy that will respond to the resulting property damage claim.
Consider a situation where a dental patient is drowsy from general anesthesia and trips while exiting the office. If the dentist failed to warn the patient of the after-effects of the anesthesia, does the claim arise as a result of professional services? Does the CGL or E&O policy respond? Or both?
PLACING WITH THE SAME CARRIER
An insured can be exposed to a number of different types or risks, demanding the need for both E&O and CGL coverage. E&O and CGL policies can work together to ensure there are no coverage gaps. The best way to maximize the co-ordinated coverage and avoid coverage disputes is to place both policies with the same insurer.
Policies issued by the same insurer are more likely to have common terms and similar definitions that eliminate coverage gaps. Potential coverage consideration such as policy periods, insured entities or “other insurance” clauses, are less likely to be in conflict.
If a claim triggers both policies, the claims-handling procedures and the insured’s claim experience will be consolidated; allocation of claims expenses, including adjusting and defence expenses, can be streamlined and minimized; potential disputes between separate insurers as to where coverage lies and who should be leading the claim will be eliminated; and placing the policies with different insurers has the potential to foster conflict and delays in handling claims effectively.
Claims are increasingly costly and time-consuming. They can also wreak havoc on a business’ reputation and its ability to conduct business.
E&O and CGL policies c
omplement one another, but it is critically important that brokers and underwriters understand both policy wordings to ensure complete coverage.
That, and using a single insurer, allows for the best result when it counts most… if there is a claim.
