E&O Insurance Branches Out

To Cover More Professional Services

Technology, hurricane-related exposures give rise to newer policy developments

By William J. Casey and Christina Terplan

Errors and omissions liability coverage continues to expand nationally and internationally. In all categories–net premiums written, capacity and various new types of specialized E&O insurance–the numbers are dramatically on the rise.

Insurers are issuing policies in more than 150 different E&O classes of business that reflect an ongoing, substantial growth in professional services, and a corresponding increase in the frequency and severity of claims and lawsuits.

Medical, legal, accounting, architectural, engineering, insurance brokers, technology, and other consulting and professional service providers are exploring coverage under the rubric of “miscellaneous E&O.”

The combined total E&O market– excluding medical malpractice, directors and officers liability, and employment practices liability coverage–has soared to more than $4 billion in premiums, according to industry estimates.

Triggering this increase is the ballooning dollar amount of E&O claims. Some individual E&O damage awards and claims pushed past the $100 million mark for the first time in recent years. This undoubtedly has prompted more professionals to ensure that they have ample coverage for damage claims and potential adverse awards.

Technology is a relatively new, but developed area of E&O coverage. Insurers are customizing their policies to the special needs of information and network technology companies of all sizes.

Technology E&O policies address the liability exposures involved with areas such as consulting, software programming and implementation, and information processing. The policies cover the actions of employees and, in some instances, independent contractors.

Gross technology E&O premiums alone have climbed to an estimated $650-to-$700 million annually, rivaling those for architects' and engineers' E&O coverage

A related and growing E&O coverage area involves privacy violations and cyber crime. Virus attacks comprise the source of greatest cyber-related financial losses, accounting for 32 percent of overall losses reported, followed by unauthorized access and theft of proprietary information (24 percent each), and denial of service (6 percent), according to the Computer Security Institute's 2005 Computer Crime and Security Survey.

This year, the federal government will conduct a comprehensive survey to measure the extent of cyber crime and its effect on the nation's 5.3 million businesses. The National Computer Security Survey will sample thousands of companies across 37 industries and run through the end of the year.

According to IBM, more than three times as many people (28 percent) think it more likely they will be the victim of an online attack such as phishing or virus outbreaks than a physical crime (8 percent) in the next year.

There is a growing feeling that standard technology E&O forms are no longer adequate to provide first-party coverage for potential claims involving security breaches. These policies generally do provide coverage for damage to intangible property, and the loss of use of it. This includes loss of use of intangible property that hasn't been physically damaged, but is affected by product defects, deficiencies or inadequacies. But losses resulting from security breaches and unauthorized access are usually unprotected by standard E&O forms.

Standard technology forms also usually do not provide liability coverage for claims by clients whose information was stolen, who were transmitted viruses, or who couldn't access Web sites.

Nonstandardized, enhanced technology E&O policies cover claims arising from the human side of electronic commerce. These include professional services relating to Internet use, security breaches, failures to prevent unauthorized access, theft of proprietary information, loss of use and denial of service.

Record hurricane-related property losses have also spawned expansion of natural catastrophe-related E&O policies. Additional coverage is being provided to encompass the pre- and post-disaster actions and responsibilities of insurance companies, insurance agents and adjusters, real estate agents, property managers, architects and engineers.

New, specialized E&O forms are providing expanded E&O coverage for real estate agents and brokers, including broader protection from possible claims or litigation. Some of the new forms cover legal defense expenses beyond the policy limits, disciplinary-proceeding expenses or a legal-expense reimbursement, protection from fair-housing discrimination complaints, and safeguards against failure to disclose the existence of pollution on properties.

Another E&O specialty area that has already branched out, and could be developing further, is protection for financial advisors, brokers and dealers. As more broker-dealers have been changing their compensation to fee-based structures, some E&O policies provide some level of investment advisory coverage.

But as more financial planners and investment advisors are taking on fiduciary roles under ERISA–the Employment Retirement Income Security Act–with 401(k) plans and other retirement vehicles, questions regarding the scope and extent of their E&O insurance may give rise to new products that specifically cover these new duties. Currently, no E&O policy explicitly covers broker-dealers' fiduciary roles.

Specialized E&O policies are continuing to evolve in response to actual or perceived new and expanded potential loss categories, and a much more litigious public. Just as “find a need and fill it” became the mantra for the marketing industry decades ago, spurring the launch of scores of “new and improved” products and services, E&O insurers are being pressed to further extend coverage for an ever-growing and ever-changing assortment of highly specialized professional services areas, and their potentially negative consequences.

William J. Casey is chair of the international Insurance and Reinsurance Practice Group of Duane Morris LLP, and practices in the area of professional liability insurance coverage and litigation. He can be reached at wcasey@duanemorris.com.

Christina Terplan is an associate at Duane Morris, practicing in the area of professional liability and specializing in technology and Internet insurance coverage and litigation. She also is a registered patent attorney. She may be reached at cterplan@duanemorris.com.

Specialized policies are extending beyond their E&O roots with more than 150 classes of professionals covered–and the count is growing.

Recent hurricanes are giving rise to new forms of E&O insurance, covering pre- and post-disaster actions of insurers, agents and adjusters, real estate agents, property managers, architects and engineers.

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