I recently had a very interesting discussion on LinkedIn regarding franchisor’s E&O, and some of the comments really beat the drum about how most franchisor’s E&O claims would arise from some kind of breach of contract and therefore would not be covered.
Au contraire, I advised the diligent commenters. Contractual breaches are the bread and butter of miscellaneous E&O.
This is a huge difference between “professional liability” where liability arises from failure to adhere to the required standard of conduct, and “errors and omissions” where the obligation between client and insured creates the basis of liability. The obligation that does exist is a matter of contract and expectation, and an error or omission that causes harm to the client can be covered, in spite of the fact that expectations and obligations were defined by contract.
The key thing to remember is that the client (or other third party) must incur damages, and those damages must have been caused by the error or omission of the insured.
The policy does not exist to pay for contractual disputes regarding payment, quality of work, etc., in a vacuum. But if quality of work is lacking and the client is harmed because of it, then liability exists that the policy is expected to respond to.
Just as back in the days of the inception of EPL, people said “you can’t insure that — discrimination is an intentional act”, many insurance agents and pundits are still thinking of damages arising from the business relationship as being purely a business risk and uninsurable. This is 1980’s thinking. With the breadth of coverage available in today’s D&O and E&O policies, there are many causes of action which can be covered that were previously inconceivable.