3.8 Professional Liability (Errors & Omissions), Umbrella & Excess Liability
Key Takeaways
Professional liability covers claims that a professional's errors, omissions or negligent acts in rendering professional services caused a client financial loss; CGL and BOP forms exclude those claims.
Most errors and omissions policies are claims-made, often with defense costs inside the limit, and they exclude dishonest, fraudulent or criminal acts.
A consent-to-settle (hammer) clause lets the insured refuse a settlement the insurer recommends, but caps the insurer's liability at the refused settlement amount plus defense costs incurred to that date.
A true excess policy follows the form of the underlying policy and pays only after the underlying limit is exhausted, while an umbrella can also drop down to cover claims the underlying policies exclude, subject to a self-insured retention.
If the insured fails to maintain the required underlying insurance, the umbrella pays as if that insurance were in force and the insured bears the gap.
3.8 Professional Liability (Errors & Omissions), Umbrella & Excess Liability
Outline items I.I and I.J cover professional liability (errors and omissions) and umbrella/excess liability. Both build on the CGL. Professional liability fills a CGL exclusion, and umbrella/excess coverage sits on top of the CGL, auto and employer's liability limits.
Why Professional Liability Is Separate
The CGL covers bodily injury, property damage, and personal and advertising injury caused by an occurrence. Professionals often cause a different kind of harm: financial loss from bad advice or a mistake. Examples include an accountant's tax error, an architect's design defect, a lawyer's missed filing deadline, or an insurance producer's failure to bind coverage. Those claims are not "property damage," and many CGL and BOP forms add a professional services exclusion. Professional liability insurance responds instead.
| Line | Typical insureds | Typical claim |
|---|---|---|
| Medical malpractice | Physicians, hospitals, dentists | Bodily injury from treatment — the professional line that does involve bodily injury |
| Errors and omissions (E&O) | Accountants, architects, engineers, attorneys, insurance producers and adjusters, real estate licensees | Financial loss to a client from a negligent act, error or omission |
| Directors and officers (D&O) | Corporate directors and officers | Wrongful acts in managing the company |
E&O for Adjusters and Producers
Adjusters and producers carry E&O because a mistake in their own work can cost a client money. Examples include a missed deadline, an incorrect coverage explanation, or failing to report a claim to a carrier. Many independent adjusting firms are required by their carrier clients to carry E&O. Public adjusters in Hawaii must post a $10,000 surety bond (5.5), but a bond is not E&O insurance. The bond protects insureds who are owed settlement money, while E&O protects the adjuster from negligence claims.
Common E&O Policy Features
- Claims-made trigger. The claim must be first made during the policy period (or an extended reporting period) for a wrongful act on or after the retroactive date. The retroactive date and extended reporting period work as described for the claims-made CGL (3.2). Professionals who retire usually buy an extended reporting period ("tail").
- Defense within limits. Many professional policies are "eroding" or "defense within limits": every dollar of defense reduces the amount left for damages. This differs from the CGL, where defense is paid in addition to the limits.
- Deductible or retention, sometimes applying to defense costs as well as damages.
- Exclusions commonly include dishonest, fraudulent, criminal or malicious acts; bodily injury and property damage (for non-medical E&O); contractual liability beyond what the professional would owe anyway; fines and penalties; and claims by one insured against another.
The Consent-to-Settle (Hammer) Clause
Because a settlement may imply professional fault, many professional liability policies require the insured's consent before the insurer settles. To keep insureds from blocking reasonable settlements, the policy adds a hammer clause. If the insurer recommends a settlement and the insured refuses, the insurer's liability is capped at:
- the amount for which the claim could have been settled, plus
- defense costs incurred up to the date of refusal.
Some forms soften the hammer so the insurer still pays a percentage (for example, 50%) of later loss above the refused amount.
Example: a client sues an architect, and the insurer can settle for $200,000 with the plaintiff's agreement. The architect refuses consent to protect her reputation, and the case later produces a $450,000 judgment. Under a full hammer clause, the insurer's liability is limited to $200,000 plus defense costs incurred up to the refusal. The architect pays the remaining $250,000 and any later defense costs.
Umbrella and Excess Liability
Both coverages provide higher limits above underlying policies, such as the CGL, business auto, employer's liability (Part Two of the workers' compensation policy), or homeowners and personal auto policies for a personal umbrella. They differ in breadth.
True Excess (Follow Form)
A follow-form excess policy adopts the terms of the underlying policy. It pays only after the underlying limit is exhausted by payment of covered claims. It covers nothing the underlying policy excludes. Some excess policies are "stand-alone" with their own terms, but in most textbook usage "excess" means follow form.
Umbrella
An umbrella policy does two things:
- Vertical extension — like excess, it pays above the underlying limits once they are exhausted.
- Horizontal (drop-down) coverage — it may also cover claims that the underlying policies exclude but the umbrella does not. Examples include worldwide personal injury or certain liability for non-owned watercraft. For those claims, the umbrella "drops down" and pays after a self-insured retention (SIR) — an amount the insured pays first, such as $10,000 on many commercial umbrellas, with smaller retentions typical on personal umbrellas.
An umbrella also drops down when an underlying aggregate limit is reduced or exhausted by claims, becoming the first layer for later claims in that period.
Required Underlying Insurance
The umbrella declarations list required underlying limits (for example, $1,000,000 per occurrence on the CGL and auto liability). The insured must maintain them. If the insured lets an underlying policy lapse or carries lower limits, the umbrella pays as if the required underlying insurance were in force. The insured is responsible for the gap.
| Comparison | Follow-form excess | Umbrella |
|---|---|---|
| Terms | Same as underlying | Own insuring agreement and exclusions |
| Covers claims excluded by underlying? | No | Sometimes (drop-down), after SIR |
| Pays when | Underlying limit exhausted | Underlying limit exhausted, or drop-down claim after SIR |
| Defense | Usually follows underlying | Often provided when underlying does not apply |
Umbrella Claim Example
A Honolulu contractor carries a $1,000,000 CGL and a $5,000,000 commercial umbrella. A crane collapse produces a $3,200,000 bodily injury judgment. The CGL pays its $1,000,000 occurrence limit, and the umbrella pays the next $2,200,000. Later that year, a libel claim arises from an online review the contractor posted, and the CGL's Coverage B is excluded by an endorsement but the umbrella has no such exclusion. The umbrella may drop down and cover the claim after the $10,000 retention.
Adjuster Coordination
When a large loss may exceed primary limits, the primary adjuster must notify the excess or umbrella carrier promptly. Umbrella notice conditions require notice of occurrences that may involve the umbrella. The primary insurer's handling of a limits demand can also expose the insured, and the primary insurer, to bad faith claims if a reasonable settlement within limits is refused (6.3).
An insurance producer fails to bind coverage that a client requested, and the client's uninsured building later burns. The client sues the producer for the lost coverage. Which policy is designed to respond?
The producer's business auto policy, under hired and non-owned liability
The client's own commercial property policy, under the coverage extensions
The producer's commercial general liability policy, under Coverage A property damage for the burned building
The producer's errors and omissions policy, which covers financial loss from professional mistakes
An engineer's E&O policy has a full hammer clause. The insurer recommends a $150,000 settlement, but the engineer refuses. The case later results in a $400,000 judgment. What is the insurer's maximum liability for damages under the hammer clause?
Nothing, because refusing consent voids the policy
$150,000, plus the defense costs incurred up to the date the engineer refused consent
$400,000, because the judgment is within the policy limit and the insurer must pay it in full
$275,000, the midpoint between the offer and the judgment
A business's umbrella requires $1,000,000 of underlying auto liability, but the business renewed its auto policy with only a $500,000 limit. A covered auto accident produces a $1,800,000 judgment. How much does the umbrella pay?
$1,800,000, because the umbrella drops down for all auto claims
$1,300,000, starting directly above the $500,000 auto limit
$800,000, as if the required $1,000,000 underlying limit were in force
Nothing, because failure to maintain underlying insurance voids the umbrella
Sections you finish are checked off in the contents.