Errors and Omissions Insurance vs. General Liability Insurance
The courts have held that errors and omissions insurance “generally protects against liability based on the failure of the insured, in his or her professional status, to comply with what can be considered in simplistic terms the standard of care for that profession.”
For property managers, errors and omissions insurance provides protections against claims specific to the day-to-day practice of property management, including:
- Invasion of privacy
- Wrongful eviction
- Lost paperwork
- Misrepresenting lease terms
- Failure to disclose issues with property
- Failure to perform adequate maintenance
- Hiring unlicensed contractors
Note that none of these items would likely be covered under a general liability policy. Liability insurance generally protects against issues that are common to all businesses (e.g. damage to or accidents on your property), where errors and omissions insurance covers you against claims specific to your profession.
If you’re a property management firm owner, principal broker, or professional, you need both: A general liability policy that covers your office and actions by your employees (the landlord will usually take care of the general liability or landlord insurance policy for the properties you manage), and an E&O policy protecting your license and firm against mistakes you or your employees may make in the course of managing properties.
Duty to Defend
Look for language in your policy that specifies that your errors and omissions insurance carrier has a duty to defend you. This is preferable to language that specifies a ‘right but not a duty to defend,’ since this takes control of your professional reputation out of your hands and gives it to the insurance company.
When the insurer has a duty to defend you, you probably won’t get to choose your own attorney. However, you can relax knowing that the insurance company knows who the best attorneys are in your market. (Chances are, it’s not your brother-in-law or golfing buddy.) Go with the insurance carrier’s recommendation. It has the upside of giving you more rights later, in case you want to assert a bad faith or legal malpractice claim against the carrier, who will probably have deeper pockets than the individual ambulance-chaser you might otherwise select.
When there’s a ‘duty to defend’ clause, the carrier must defend ‘all four corners of the complaint’—a broad subject in legal terms, but one that makes it more likely, not less, that your insurance carrier will be at your side, mounting an effective defense and covering costs when the chips are down.
Stop! Hammer Clause!
When a broker or property manager is involved in litigation resulting in an errors and omissions insurance claim, what’s at stake often isn’t just money—it’s also the property manager’s professional reputation.
However, litigation is expensive. Your insurance carrier isn’t invested in your professional reputation. When litigation costs are mounting with the verdict in doubt, your carrier may want to limit their losses and settle early. This may not be what you want. If you believe that the plaintiff’s case is without merit, you may want to go to the bitter end, confident that when all the facts are out, they will exonerate you.
Will your insurance company be with you? That depends, in large part, on your policy’s ‘hammer clause.’
The hammer clause—also called the ‘consent to settle’ or ‘cooperation’ clause—defines the duty of the insurance company to continue to defend you in court, even when a favorable settlement opportunity presents itself.
There are generally two elements to the clause:
- Language requiring your insurer to obtain your consent prior to settling a claim out of court
- Language limiting the insurance company’s losses to the amount of the settlement, plus defense costs—but only up to the date you didn’t consent
Potentially, this can put you in a bind: Suppose the plaintiffs come forward early with a low-ball settlement offer, but one that leaves your professional reputation in shambles. The hammer clause could limit your protection to the low-ball offer, plus the limited defense costs incurred when the case is just getting started.
Fortunately, it’s very rare for errors and omissions insurance companies to assert the hammer clause in practice. This is because courts have generally come down hard on insurance companies on any whiff of a ‘bad faith’ claim.
There is also some case law that restricts insurers from being able to invoke the hammer clause to limit their losses—especially if their contract language indicates that your consent to settle ‘will not be unreasonably withheld.’ At first glance, this vague language seems to be to the disadvantage of the insured. After all, we all want to be reasonable, right? But in Clauson v. New England Insurance Co., the carrier wanted to settle a legal malpractice case against their attorney client for a low $29,000. Their client refused, and New England Insurance Co. invoked the hammer clause, theoretically limiting their losses to $29,000 plus nominal defense costs to that point.
Their client ultimately lost the case, getting hit with a $98,000 judgment. The plaintiff sued the insurance company for payment—and the insurance company argued that the hammer clause limited their liability to $29,000, and the rest had to come from the insured.
No dice, ruled the U.S. Court of Appeals for the 1st Circuit. Rhode Island law required that insurance policies be “be construed in a manner that harmonizes and gives effect to all of its material terms and quotations and avoids rendering any provision meaningless.” The court ruled that invoking the hammer clause essentially nullified the insured’s rights under the ‘consent to settle’ clause.
Clearly, an all-or-nothing hammer clause can be problematic for both the carrier and the insured. However, errors and omissions insurance carriers have been ‘softening’ the hammer clause, going to a 70/30 or 80/20 cost share if the insured declines a settlement. From your perspective as the insured, this is preferable to an all-or-nothing deal—but if you can get the hammer clause taken completely out of the policy, or get your broker to shop around for a policy without a hammer clause, that is optimal, and may be worth the extra cost in premiums.
Limit of Coverage
All policies will have an overall cap on coverage. The right amount of coverage will depend on your firm size, number of employees, and size of the properties that you manage. Those managing thousands of tenants will need a higher limit than those managing dozens, of course. Consider an umbrella liability insurance policy that can pick up where your errors and omissions insurance coverage leaves off.
Tail Coverage & Prior Acts Coverage
Pay close attention to what happens when you change carriers or your coverage lapses. Most carriers offer tail coverage, or ‘extended reporting’ coverage, that helps to protect you against claims that arise down the road from actions that originated while the policy was in force.
Prior acts coverage provides protection from claims arising from events or actions that occurred before your coverage was in place. Tail coverage provides lingering protection against claims arising after the policy expires or is cancelled, from events that occurred while the policy was in force.
Some carriers only allow you to purchase tail coverage if the carrier cancels. This is not to your advantage. The best policies have what’s called a ‘bilateral tail’—that is, you have the right to purchase tail coverage whether you cancel the policy or the carrier cancels it.
This is a critical consideration for licensed insurance brokers who may leave the employ of one firm for another. If you go to a new company, your new errors and omissions insurance carrier that the company hires won’t provide protection for actions that you took at your old firm. For this reason, professionals may want to consider having their own errors and omissions insurance coverage, independent of the coverage in place for their firm.