An E&O Eye Opener
A guide to help environmental professional's errors and omissions insurance policies
In our litigious society, professionals of all kinds are keenly aware that their expertise and professionalism cannot always protect them against being sued. For environmental professionals, the uncertainty and variability associated with the natural environment compounds the risk of litigation -- and, therefore, elevates the importance of liability insurance. Obtaining adequate insurance protection is not simply a matter of buying enough coverage. Pollution engineers and consultants need to fully grasp the terms of their liability insurance policies, including some provisions worth fighting for when buying coverage, as well as the claims procedures that will maximize coverage.
Errors and omissions (E&O) insurance can protect you when you give a clean bill of health to a building site that is later alleged to have environmental problems; when your remedial design does not work; or when the mold, asbestos, lead-based paint, TCE (trichloroethylene), PAHs (polyaromatic hydrocarbons), or indoor air quality you were supposed to fully address allegedly causes another to suffer harm. Like most varieties of insurance, E&O coverage is a world unto itself, with its own language. To secure effective coverage, environmental professionals must be knowledgeable about such issues as what constitutes a claim, how free they are to settle on their own or reject an insurance company's proposed settlement, whether defense costs will deplete their settlement limits, and how far the insurance company's duty to defend extends if the policyholder is accused of wrongdoing. These and other issues are addressed below.
E&O Insuring Agreement
The insuring agreement of a standard professional liability insurance policy typically contains a promise by the insurance company that sounds straightforward but is in fact honeycombed with terms that can become bones of contention. The standard E&O policy's insuring agreement contains the following promise by the insurance company:
To pay for all loss that the policyholder becomes legally obligated to pay as a result of claims first made against the policyholder and reported to the insurance company during the policy period and arising out of any actual or alleged negligent act, error, or omission in the policyholder's performance of professional services.
The first issue is whether the policyholder has suffered a "loss." E&O insurance policies generally define "loss" to include all damages and judgments rendered against or settlements entered into by the policyholder. In the majority of E&O policies, "loss" also includes all costs of the policyholder's defense -- namely, costs to investigate a claim and to pay for lawyers to defend the policyholder in a lawsuit.(1) Accordingly, in the majority of cases, the "loss" element is satisfied as soon as a claim results in costs to hire legal counsel.
Loss, Duty to Defend, and Shrinking Limits
Duty to defend policies pay for defense costs in addition to the "limits" available to pay actual judgments and settlements. However, as discussed above, most E&O policies include defense costs within the definition of "loss," meaning that defense costs expended will actually reduce the coverage "limits" available. Environmental professionals should pay close attention to this distinction. In this era of heightened accountability, losses arising out of scientific or engineering errors likely will continue to expand and result in corresponding increases in the sizes of judgments and settlements. As settlements and judgments rise, professionals and/or their insurance companies will have more economic incentive to litigate. As people and corporations become more willing to spend more money to defend claims that are larger than before, environmental professionals are likely to use up more of their insurance limits on defense costs, leaving less for settlements and judgments.
You can minimize the consequences of the shrinking limits problem by seeking to obtain an E&O policy with a separate duty to defend. Alternatively, you can address the problem by purchasing additional limits, either in the form of a primary policy with greater limits or "umbrella" and excess liability insurance policies, which provide separate additional coverage.
Although "loss" typically includes settlements, E&O policies generally contain a so-called "hammer clause," which purports to protect a professional's reputation rights. Unlike other liability insurance policies where an insurance company can settle cases within limits at its own discretion, a policyholder who is a professional generally has veto rights regarding settlements, in part, to protect his or her own professional reputation.
Insurance companies may attempt to limit their liability where they know that the professional may seek to invoke the hammer clause. For example, the insurance company may propose to its policyholder that a low settlement offer be made to make the case disappear. If the policyholder asserts his or her veto rights, the insurance company may later argue that it should only be liable for the amount of its initial proposed settlement offer. To protect themselves, policyholders should document the insurance company's initial low ball offer and try to establish that the plaintiff would never have settled for such a low number.
Negligent Act, Error, Or Omission In The Performance Of Professional Services During The Policy Period
In addition to "loss," there must be a "negligent act, error, or omission" committed during the policy period (2) by the policyholder in the performance of "professional services." One should be able to discern from the underlying lawsuit whether the claim or claims are based upon allegations of a negligent act, error, or omission and whether such negligent act, error, or omission is alleged to have been committed by the policyholder during the relevant time period.
The fundamental issue is whether the alleged negligent act, error, or omission occurred in the performance of "professional services." Given the wide range of services an environmental professional may perform, scientists and engineers should pay particular attention to this issue because coverage often hinges on it. Resolution of this issue generally depends upon the policy language, which may define the phrase "professional services" in the declarations page or the body of the policy. If "professional services" is not defined, a policyholder may be able to rely upon the extensive body of case law in which the consensus construction of the phrase "professional services" is "services related to the performance of duties within the person's area of expertise."
A safer way to ensure that coverage exists, however, is proper delineation in the insurance application of the specific services the covered professional performs. For example, environmental professionals should properly and fully disclose the range of services they perform, which may include, without limitation, investigation, design, design implementation, construction, inspection, remediation, mitigation, dredging, excavation, consulting, regulatory coordination and analysis, use of computer technology, and litigation support work to name but a few. Significant changes in your professional activities over time should also be brought to your insurance company's attention.
E&O policies are typically written on a "claims made and reported" basis, meaning that to trigger coverage under the policy the following two things must occur: a "claim" must be: (1) first made against the policyholder during the policy period; and (2) reported to the insurance company during the policy period.(3)
A "claim" is typically defined to include a complaint filed in a lawsuit or when some form of alternative dispute resolution is invoked. In the environmental liability context, a "claim" could include compulsive threats such as those contained in CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) PRP (potentially responsible party) notice letters. A "claim" can also be defined broadly to include "any demand for money or services." Whatever the term "claim" is interpreted to mean, however, the relevant date for obtaining claims-made coverage is not the date of the negligent act, error, or omission but the date that the "claim" is actually made and the date it is reported to the insurance company.(4)
Disputes Arising Before Claim
Coverage problems may occur where an underlying dispute arises in one policy period, but the "claim" does not materialize until the next policy period. The insurance company in the first period will typically take the position that no coverage is afforded during its policy period because a "claim" did not arise until the second period. The insurance company in the second period may argue either that the claim arose in the first period when the dispute arose or that there were circumstances that the policyholder knew would result in a claim prior to the inception of its policy period. Faced with this scenario, a policyholder should provide notice to its current insurance company any time there are circumstances where it becomes aware of a possible claim. Providing proper and timely notice of an actual or potential claim is one of the most important elements of protecting your coverage rights.
In the above example, the policyholder should notify the first insurance company when the dispute arises. The policyholder should also notify the second insurance company not only when the claim arises, but also when first filling out the insurance application, to avoid the possibility of losing coverage because of an alleged misrepresentation. In this way, if the insurance companies take the positions set forth above, the policyholder should be ensured of a recovery from one of them.
Change of Employment
Another "claims-made" issue arises where a policyholder changes employers or sells a business, opening a potential gap in coverage. For example, the policyholder commits a negligent act, error, or omission while employed by a prior employer, and the "claim" is not made against the policyholder until he or she becomes employed by the current employer. The current employer's insurance company may deny coverage, claiming that the negligent act, error, or omission took place while the policyholder was employed elsewhere. Obtaining coverage under the prior employer's E&O insurance policy will depend upon the extent to which the prior employer purchased optional extended reporting coverage, something often outside the control of the environmental professional involved.
Even if coverage is initially triggered, there are exclusions (often in fine print) that can operate to bar coverage under E&O policies.
Virtually all general liability insurance policies sold today -- and many E&O policies as well -- attempt to limit the insurance company's liability through the use of exclusions regarding pollution. If your professional activities result in claims against you for property damage or bodily injury as opposed to, or in conjunction with, economic losses caused by professional malpractice, these exclusions may come into play. Pollution exclusions typically state that insurance does not apply to liability "arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time."
Plainly such exclusions have no place in an E&O policy sold to environmental professionals, and, in fact, standard E&O policies tailored to environmental professionals do not contain this exclusion. Unfortunately, however, a fair number of environmental professionals unwittingly purchase generic policies that do contain this exclusion, an error to be avoided at all costs.
If you are unfortunate enough to find that your claim is denied because your E&O policy does contain a pollution exclusion, you may be able to advance the legal argument that an E&O policy containing a pollution exclusion sold to environmental professionals provides "illusory coverage" and that the exclusion is therefore null and void. Arguably, almost all liabilities an environmental professional may face for professional malpractice would seemingly be liability "arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time." If the pollution exclusion were found to apply, the environmental professional would have paid a premium for E&O insurance providing virtually no coverage. There is significant authority that supports the theory of nullification because of illusory coverage in other contexts.
While insurance companies generally do not try to sell E&O policies with "absolute" pollution exclusions to environmental professionals, they sometimes slip in a more limited exclusion purporting to bar coverage for claims "arising out of any waste or products or materials" shipped off-site as part of providing professional services. This exclusion, reflecting an underwriting concern over improper disposal, may be an issue depending upon the nature of your professional services. If your work does involve off-site disposal of hazardous materials, beware of this provision.
Exemplary Damages, Penalties, Fines, or Disciplinary and Administrative Proceedings
E&O insurance policies generally attempt to exclude claims for exemplary damages, fines, and penalties, i.e., damages imposed to set an example. Punitive damages are a common form of exemplary damages and are often expressly excluded from coverage. If they are not, insurance coverage might still be available for judgments that include punitive damages, depending upon the jurisdiction. Further, E&O policies for environmental professionals generally exclude coverage for administrative and professional disciplinary proceedings.
Known Prior Acts
Claims arising from circumstances known by the policyholder prior to inception of the policy period as likely to lead to a claim may be excluded depending on who knew what and when. Where properly disclosed, professional liability claims-made insurance policies often have provisions dealing with how to decide when a "claim" arises for purposes of delineating which policy must cover such circumstances. Usually, the policies will contain a provision deeming the claim to have been made when the notice of the circumstances is given. It cannot be emphasized enough that policyholders should provide notice as soon as possible of any circumstances that might lead to a claim.
ConclusionObtaining the right E&O insurance coverage and understanding your rights and obligations is the key to successfully protecting yourself from litigation or resolving lawsuits against you or your firm arising out of your professional activities. Proper disclosure on insurance applications, during the underwriting process, and in the event of an actual or potential claim can be the determining factor in whether or not you ultimately are covered. Insurance, just like a chlorinated solvent, can be volatile and may break down when you do not expect it. Insurance companies have lots of incentives for avoiding or denying claims. Take steps now to make sure they do not successfully deny yours.
- Some E&O policies do not include defense costs within the definition of "loss" but instead contain a duty to defend, which is the duty to pay such defense costs directly regardless of the merits of the action. The duty to defend is unlimited in terms of maximum defense expenditures, is paid for in addition to limits available to pay for judgments and settlements, and is triggered when the claim alleged is arguably or potentially within the scope of coverage.
- Some policies also have "prior acts" coverage, meaning that the negligent act, error, or omission may take place either: (a) during the policy period; or (b) at some time before the inception of the policy but after a "retroactive date" stated on the "declarations" or summary page of the insurance policy.
- Some policies are claims-made-only policies, requiring only that the "claim" be made during the policy period. A minority of policies are written on an occurrence basis, which provides continuing coverage depending on the date of the harm caused by the negligent act.
- Insurance companies also provide for Automatic Extended Reporting Periods, which, in the event of cancellation for anything other than nonpayment of premiums, provide additional insurance for claims first made and reported to the insurance company during the extended reporting period, typically 30 to 60 days, provided the negligent act, error, or omission took place during the policy period or after the retroactive date. Some insurance companies also sell Optional Extended Reporting Periods, which, for an additional premium, provide coverage to cancelled policyholders for claims first made and reported during the extended reporting period, provided the negligent act took place during the initial policy period or after the retroactive date stated in the declarations.
This article originally appeared in the 07/01/2005 issue of Environmental Protection.