Professional liability brokers repeatedly receive requests from insureds to add the insureds' clients onto their errors and omissions policies as additional insureds. As outsourcing has become more prevalent, so has this request.
At first glance, this request seems quite reasonable. A client requests to be added as an additional insured (AI) with the intent to have the insured's E&O policy provide defense and indemnification if an error or omission by the insured results in the client being sued.
For example, a Web designer--the insured--uses an unauthorized image on a client's Web site. The holder of the copyright then sues the client.
Although this might seem like a good reason to add the client as an AI, most of the time, a request to add a client as an additional insured on an E&O policy stems from a misunderstanding of the policy. There are three questions a broker should ask when such a request comes in.
o Is it even possible? In other words, will the carrier take the risk?
o If it is possible, is it desirable?
o Finally, if the decision to add the client onto the policy as an additional insured is made, what changes to the program should the insured make?
Adding clients as additional insureds on a general liability policy is commonplace, so why not on an E&O policy?
Quite simply, some carriers will not allow additional insureds on E&O policies for several reasons.
First, many reinsurance contracts will not allow non-professionals to be added to the policy, so the carrier's hands are tied.
Secondly, coverage under the policy is triggered by allegation of failure to render, or negligence in rendering a defined professional service. Typically, the AI is not rendering the professional service and therefore coverage will not be triggered.
Additionally, underwriters offer terms based on an analysis of the insured's exposure (services, revenue and other measures). Adding AIs broadens the scope of potential liability, and is difficult to underwrite. When an AI submits a claim to the carrier, they expect defense to be tendered even when there are no allegations of professional misconduct or negligence. Furthermore, if the AI's operations involve broader services than the insured's, then it could potentially open the policy to claims from the AI's other professional activities.
Professionals, by law, are liable for their own negligence and the negligence of those for whom they have assumed vicarious liability (those who they have a right, ability and duty to control). However, E&O policies, by and large, exclude liability assumed under contract except when liability would have existed regardless of the contract. Therefore, when an insured accepts additional liability via contract, the contractual liability exclusion would preclude coverage under the policy.
Additionally, E&O policies contain insured-versus-insured exclusions that preclude coverage when one insured sues another insured under the same policy. The thought behind this is not to cover internal disputes and to exclude such a moral hazard.
E&O policies are "pay on behalf of" policies, which means the insurer will pay damages in the insured's stead when a client or third party is injured by the insured's negligence in providing professional services. The E&O policy is designed to compensate parties other than the insured. In situations where the client, an AI, is suing the insured, the exclusion in the policy will be triggered and, therefore, no coverage will be provided.
Furthermore, defense costs in most E&O policies are included within the limit of liability. Therefore, covering the defense of AIs can rapidly erode one's policy limit, thus potentially leaving the insured exposed. Moreover, if the carrier is tendering a defense for both the insured and the AI, then a potential conflict of interest could arise.
If the carrier agrees to add a client onto the policy as an AI, and, in spite of all the above reasons not to, the insured elects to add their client as an AI, there are several items the insured, the broker and the AI need to address.
First, the AI endorsement needs to be carefully written to consider the AI an insured only in certain limited and clearly defined circumstances so as to limit the effect of the insured-versus-insured exclusion. Even with such a well-written endorsement, however, once the client seeks coverage as an AI, then any related claims made against the insured by the AI will not be covered.
Secondly, the AI must be made aware of the reporting requirements under the policy. Some questions that must be addressed are: When must notice be given to the carrier? What is the definition of a claim? Is the policy a duty-to-defend policy? Does the policy contain a strict hammer clause? (See "Insureds Need To Sort Out Potential Hammer Effects," NU, Aug. 4, 2008, http://bit.ly/7x1ctI).
Alternatively, rather than adding a client onto their policy as an AI, consider coaching the insured to respond to the client's request by doing the following:
o Explain why such an action is not in the client's best interest. It provides no added protection and could actually reduce or eliminate coverage entirely.
o Work with the client and carrier to set a minimum policy limit and maximum deductible/retention that all parties feel comfortable with--ones that will provide an adequate limit of liability and a deductible that the insured can meet even in a catastrophe, and at a premium that is affordable.
o Assure the client that all reasonable effort will be made to maintain coverage for a specified period of time after the contract has ended, and negotiate a preset bilateral tail option. A bilateral tail means the insured may elect to purchase tail coverage (or an extended reporting period) if either the carrier non-renews or the insured elects not to renew the policy.
By working with their clients in good faith, and by expressing a solid understanding of the E&O policy, insureds can demonstrate that they are thorough, reliable and informed. Ultimately, such a demonstration can only help assure the clients that they have selected the right professional with which to contract.
Damien Magnuson is an assistant vice president of Executive Perils, a Los Angeles-based national wholesaler solely dedicated to D&O, E&O, EPL, digital, intellectual property, media, legal malpractice, insurance agents E&O, crime and fiduciary liability insurance. He may be reached at firstname.lastname@example.org.