What Are Common Exclusions On an E&O Insurance Policy?

Claims that should be covered by other insurance.
• Bodily injury/property damage (BI/PD): should be covered by GL, property, workers comp, employers liability.
• Products liability: should be covered by GL or a dedicated products liability policy
• Securities violations: should be covered by a D&O policy
• Pollution: should be covered by a pollution liability or environmental impairment liability policy
• Employee benefits and ERISA violations: should be covered by a fiduciary liability policy
• Harassment, discrimination, workplace torts: should be covered by an EPLI policy.
• Violation of privacy laws: when not covered as a personal injury, this should be covered by a cyber policy.
 
Bodily injury and property damage
E&O and GL policies are designed to compliment each other: GL policies have professional services exclusions and E&O policies have bodily injury/property damage exclusion. Claims related to bodily injury, sickness, disease, death, mental anguish and damage to tangible property will usually be denied. An E&O policy is designed to respond to financial losses.

The exceptions to this rule would be medical malpractice polices and E&O policies with a coverage extension called “contingent bodily injury and property damage.” Contingent BIPD coverage carves back the BIPD exclusion by saying “provided, however, this exclusion shall not apply to claims arising out of professional services.” For example a SaaS company who makes an emergency response app might be exposed to a bodily injury claim if there was a failure in the app.
 
Contract exclusion
This is one of the more confusing E&O exclusions since the policy is designed to insure against contractual disputes. But there is an explanation:

All this is doing is limiting the types of contracts the insurer exposes itself to. A service agreement with a client won’t be excluded from a consulting company’s E&O coverage. If the consultant gets into a dispute about an easement on a piece of property, however, this is not something the underwriter wants to deal with.

The language of this exclusion will usually have a carveback along these lines: “however, this exclusion shall not apply to: (1) the obligation to perform Professional Services; or (2) liability an Insured would have in the absence of a contract, including without limitation, the obligation to conform Professional Services to any implied or statutory standards of care.

(1) is obvious. A breach of contract claim should be covered if it’s regarding a contract for professional services.

(2) is less obvious. What liability would an Insured have in the absence of a contract? Certain torts. All this is really saying is that if the insured commits a wrongful act that would otherwise be covered, it doesn’t matter whether or not it’s addressed in a non-covered contract. Basically: if it should be covered, it will be covered.
 
Fines and penalties imposed by government agencies
For the most part, E&O is not designed to cover these. D&O and Cyber insurance has specific coverage agreements related to related to regulatory investigation, fines and penalties but most E&O policies will not pay these costs. The spirit of this policy is more narrowly focused on the defense costs and damages stemming from professional services disputes.
There are, of course, exceptions. One is E&O for financial institutions. VCAP, Bankers Professional Liability and Investment Advisor E&O policies (among others) will include coverage for fines and penalties as they insure businesses in such heavily regulated industries. Where allowed by law, insurers often respond to a high demand for protection but they do price the coverage accordingly.
 
Intellectual property
While some policies include media or content liability coverage and other forms of intellectual property coverage, not all do. Patents are never covered. Trade secrets may or may not be included. Any policy that includes some content liability coverage (e.g. one for a SaaS company with a blog) will likely offer limited IP coverage such as copyright and trademark infringement.
 
Liquidated damages
Liquidated damages are pre-agreed rates or amounts of compensation for specific contract breaches that are detailed in a contract prior to the professional service being performed. For example a architect could agree in contract to pay her client a certain amount every day she is late in completing the project. This is not something the carriers view as an insurable risk. Coverage for liquidated damages would also expose the carrier to fraud and collusion between claimants.
 
Faulty workmanship, false advertising, promises of cost savings
These are all separate exclusions which share a common theme: this policy isn’t there to protect companies from bad business practices. Mistakes, omissions and glitches? Yes. These things happen, we’re all human, so on and so forth. Incompetence, inefficiency and snake-oil sales? Nope.

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11/25/2024