Opinion: Are your clients buying enough E&O coverage?

Your clients are putting themselves at greater risk if they’re relying on general liability instead of proper errors and omissions coverage to guard against any issues that may arise. The responsibility falls to brokers to ensure their clients have the right covers.

A number of clients might think having a general liability cover is all the protection they need. But they would be wrong. There has been a noticeable increase in the number of professional service businesses and consultants buying insurance solely to meet certificate of insurance (COI) and contractual demands, instead of buying insurance to address the exposures they actually face.

These businesses come in all shapes and sizes; the services they provide are equally broad in scope. Whether they’re a government consultant, an engineer, a training company or a project management business, they can all create a financial loss if they fail to perform their services properly or on time.

COIs and contracts often only require service providers to buy general liability insurance, so it’s probably not that surprising to find so many companies and consultants who believe a general liability policy is all the cover they need to purchase. This is particularly the case in the oil and gas industry, where it’s common to see geologists, wellsite managers and even pipeline inspectors only buy general liability — even though their main exposure is financial loss arising out of their professional negligence.

iStock.com/greenleaf123

Unfortunately, this often leaves a gaping hole in the level of protection a professional services business buys. Brokers have a responsibility to ensure their professional clients have the most appropriate cover for their businesses and not simply the insurance required to meet the needs of a COI or contract.

It’s important to understand why E&O provides critical cover for professional services businesses and how it works alongside their general liability policy. You can ask your client five questions to determine whether they need E&O cover:

• Do they provide professional advice or services for a fee?
• Could they cause their customers a financial loss?
• If they don’t perform on time or to their customer’s satisfaction, would they be in breach of contract?
• Could a customer withhold fees if they’re unhappy with their service?
• Do they use a subcontractor to complete projects? If yes, what cover do they have if the subcontractor is dishonest, fraudulent or negligent?

If they answer yes to any or all of these, they need the protection E&O cover affords them.

The easy way to demonstrate the need for E&O in addition to their general liability policy is to explain the main difference between the two.

General liability policies are designed for businesses whose activities involve manual or hands-on services, which is why these policies focus solely on property damage and bodily injury. They don’t cover the most common professional exposures a firm will face; these centre on the work they do for their customers, particularly the professional advice or services they provide for a fee.

So if your client only carries general liability cover, the client won’t be covered if they face a claim for poor performance, inadequate service, or negligent advice. If the quality of work provided by an appointed subcontractor is below par and their customer lodges a claim, they won’t be covered under their general liability policy. If their customer withholds fees, they can’t turn to their general liability policy for help.

E&O policies, on the other hand, were designed for professional businesses. For these types of businesses,  the likelihood of a customer claiming for financial loss arising out of inadequate service or negligent advice is much higher than an accident in the workplace. They provide affirmative cover for these exposures.

The protection offered to professional services firms can’t be ignored. A financial loss can be far more costly than a physical loss and the consequences of not having this valuable cover could be devastating for their business.

It’s a conversation brokers need to have.

Tom Chaplin is the Canadian professions team leader at CFC Underwriting

Feature image by iStock.com/fizkes