What should I look for in errors and omissions insurance?

Manufacturers’ errors and omissions, along with product recall extensions, continue to gain traction within the commercial general liability insurance market segment. It is recognised that a variety of claims scenarios are not addressed by traditional Broadform or Public and Product insurance liability wordings in Australia.

Whilst product recall extensions produce demonstrable inroads into addressing these exposures, a number of potentially far-reaching limitations remain. Here’s why!

Imagine you as an insured are a metal or plastics manufacturer and are reviewing your liability program for potential liabilities. A standard public and products liability insurance policy caters for personal injury and property damage arising from the supply of defective products. Realising that financial damages to a third party, caused by neither personal injury or property damage is an exposure problem, a sublimit for manufacturer’s errors and omissions is added.  

An error in the manufacturing process subsequently leads to the inadvertent supply of a defective product to an end-product manufacturer. They in turn are unable to incorporate your product into their final product for consumer end-use, resulting in a claim being brought against you for a loss of sales and replacement costs for the faulty goods. Although the extension will address the financial damages, of a third party for the loss of sales, the cost of repair, reconditioning, replacement or making good the products you have supplied will often be excluded.

Is Errors and Omissions Cover Enough?

It is also important to note that the scope of coverage under an errors and omissions endorsement, does not adequately stand in as a substitute cover for professional indemnity policies. Defective products which arise out of any design or professional advice, charged for a fee by the insured are typically excluded.

Product Recall Cover

The Product Recall Expenses extension is regularly added to the policy to indemnify the insured for reasonable and necessary costs, incurred in respect of removal of products from the marketplace when the products pose an imminent threat of personal injury or property damage.

It is crucial to distinguish the parts of product recall coverage. Often, product recall endorsements will only cover direct expenses or first-party expenses, such as communications to customers and the public, including media announcements, shipping, warehouse and storage expenses, cost to dispose of products and cost of extra personnel required to conduct the recall.

In circumstances where there is a third party company that distributes the insured product on the insured’s behalf, recall expenses that the third party may incur as a result of a decision by them, to withdraw products from the market will often not be covered by a product recall endorsement. Checking the nature of the operative clause of the wording, to ensure the cover meets the insured’s exposure requirements is paramount.

To conclude, the above commentary is a brief outline of the most common talking points we encounter, surrounding the limitations of these endorsements. We invite you to contact us to discuss your specific client needs.

Berkley Insurance Australia is a registered business name of the Australian branch of Berkley Insurance Company (ABN 53 126 559 706). Berkley Insurance Company is authorised by the Australian Prudential Regulation Authority as a general insurer to conduct new or renewal business. The information and opinions contained in this document are general in nature. You should consider what insurance is appropriate for you or seek independent insurance advice.

Here’s how general liability and errors and omissions insurance are similar:

Both policies cover certain unavoidable liabilities. If you have an office building that’s open to the public, you can’t completely avoid the risk of an accident that injures someone on your property. Likewise, if you provide professional services, there’s always the risk that someone will accuse your work of causing them financial losses.

Both policies may be required by client contracts. A general contractor might require a subcontractor to carry their own general liability insurance. The same goes for professionals who work with large clients; the clients may ask your business to carry a certain amount of E&O coverage before they'll work with you. In both instances, the other party is trying to limit their liabilities in case something goes awry with your work.

Some general liability policies have work liability protection. For example, construction professionals likely have general liability policies that include product liability insurance. This coverage protects the policyholder from lawsuits over finished work that physically hurt someone. For instance, if a contractor builds a deck that collapses, the homeowner could sue for damages if they're injured.

Both policies are usually claims-made coverage. Claims-made coverage means you can only collect your insurance benefits if both the alleged incident and the filed claim happen while the same policy is active. In the example of the collapsing deck, your general liability policy would have to be in force both when you built the deck and when the client initiated the lawsuit.

Errors and omissions and professional liability insurance offer identical coverage. While the two policies are the same, different industries use different terms to refer to the same coverage.

Insurance agents, real estate agents, tax preparers, and IT professionals use the term errors and omissions insurance. But accountants, architects, consultants, and engineers call this policy professional liability insurance.

Lawyers and doctors refer to the same liability policy as legal or medical malpractice insurance. (While Insureon doesn’t offer quotes for malpractice insurance, our licensed agents are happy to provide doctors and lawyers with other essential business insurance policies.)

Learn more about E&O vs. professional liability insurance.

Updated 03:30 PM EST, Mon November 2, 2020