It’s important to avoid confusion concerning the difference between Errors & Omissions (E&O) and Professional Indemnity (PI) insurance cover.
The key to understanding if your client requires an E&O extension under a General Liability policy, is distinguishing whether they are a manufacturer.
Types of PI and liability policies
Professional Indemnity insurance covers the insured against the consequences of a breach of professional duty, particularly allegations of negligence.
Negligence-based PI policies generally cover losses where it can be shown that the insured owed a duty of care to the claimant and that the insured breached that duty causing the claimant to suffer loss or damage.
However, a PI policy will not cover claims arising from the supply of goods, including the physical construction, manufacture, installation, repair or maintenance services.
A typical general liability policy only responds where there is personal injury or property damage. It does not cover faulty workmanship, repair, reconditioning, replacement or making good products that have been supplied.
Act, error or omission policies provide broader cover including for PI claims arising from negligence, contractual liability, statutory breaches (such as misleading and deceptive conduct) and equitable breaches such as breaches of fiduciary duty and breaches of trust.
Policy wordings should be read carefully as some breaches may be excluded. For instance, whilst the policy may cover contractual liability, most contain contractual liability exclusions in relation to liability assumed by the insured over and above common law.
Civil liability policies, meanwhile, are generally considered broader wordings and, as the name suggests, provide coverage for liability arising out of civil law as opposed to criminal law. Criminal liability or penalties that could be imposed by statutes, for instance, would not fall within this coverage.
The manufacturers' E&O extension
General Liability policy with a manufacturers' E&O extension can provide coverage for financial loss where a product fails and there is no property damage. E&O is not quasi Professional Indemnity Insurance. It is intended for manufacturers of goods.
What types of claims are made against manufacturers?
Case study 1 — Pie Maker
The insured manufactures pies and sells them to a wholesaler who then distributes them to service stations.
An error in the packaging means the wholesaler is unable to distribute pies for an entire week, resulting in lost revenue of $500,000. The wholesaler also loses a large account for being unable to fulfil contractual requirements.
Case study 2 — Supermarket Chain
The insured was contracted to manufacture a batch of chocolate bars under an agreement with the claimant – who in turn sold the product to a supermarket chain. The supermarket’s customers complained of “spots” on the bars with a mould-like appearance.
The supermarket chain decides to recall the affected batch of product and claims against the claimant for loss and damages, including loss of sales. The claimant seeks indemnity from the insured.
The claim amounts to $49,000 including the cost of cocoa bean which had been supplied by the claimant to the insured for the manufacture of the chocolate bars.
An investigation determined the “mould-like” appearance was likely the result of the insured using larger salt granules in the defective batch of chocolate bars.
Claims made & notified and retroactive dates
E&O is a claims-made and notified extension. This means that if your client receives notice of a claim during the policy period, the claim must be notified to the insurer before expiry of the policy period. If a claim notification is received after the expiry date of the policy, it will not respond.
Retroactive dates also apply to E&O extensions. Claims arising from acts, errors or omissions occurring before the retroactive date are not covered.
Accordingly, it is important for you to check and confirm the appropriateness of the retroactive date for your client’s E&O extension.
Considering manufacturer E&O exposures
In order to determine your client’s E&O claims exposure you should take steps to stay up to date about their business mix, complexity and client profile, especially any larger clients they might pick up.
As your client’s business grows, they may take on larger clients or have a concentration of clients giving them greater exposure to a claim for loss or damage arising from one of their products.
To assist discussions, it can be helpful to ask your client about their critical operations, tolerance levels and what would occur if their ability to supply products to customers was disrupted because of a defect in their product.
For example, would this cause financial loss to customers? Further, keep in mind relevant variables such as supply side shortages that are currently being experienced globally.
It is also important to evaluate if your client needs E&O cover.
We often receive requests for E&O cover for a client because it is already on their existing policy. However, there are instances where the client may be paying for additional insurance cover that isn’t suited to their exposures.
For example, a retail furniture store who only sells their product to a customer online or instore may not have any exposure to E&O. If they are unable to fulfil an order will there be a financial loss?
Disruption is Expensive
Many supply chains in the manufacturing sector have become so condensed and suppressed that their ability to handle or accommodate disruption is significantly reduced.
It's very important to keep supply side issues in mind when considering how disruption might affect your clients and their customers.
Need More information?
Each month we hold exclusive brokers sessions that cover topics such as E&O vs PI. For information on our upcoming sessions visit our website here.
Berkley Insurance Company ABN 53 126 559 706 t/as Berkely Insurance Australia is an APRA authorised general insurer. Information provided is general only and has been prepared without taking into account any person’s particular objectives, financial situation or needs. Insurance cover is subject to terms, conditions, limits, and exclusions. Underwriting criteria applies. When making a decision to buy or continue to hold a financial product, you should review the relevant Policy Wording.