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E&O Restrictions

Errors and omissions insurance, in simplest terms, is a pooling of money by a group of professionals in an effort to share the risks associated with malpractice claims.  The pool is funded through premiums which are paid to an insurance carrier who administers this pool of funds.  In the event of a malpractice action, a member of the group can draw upon the pool, by way of a claim to the insurance carrier, to pay for the costs of defending the claim ("Defense Costs") and the cost of the claimant's damages ("Indemnity Costs").

The amount of money which each member must contribute to the pool by way of premiums is a direct function of the amount of money which is being paid out in connection with claims.  In an effort to control the amount of premiums which members must pay, E&O Policies contain certain restrictions.  Some common restrictions and their rationale include the following:

1)  Policy Exclusion Provisions:  Virtually every E&O Policy excludes coverage for certain acts.  Some of these acts, such as intentional acts, are excluded because it is against public policy to insure those acts.  Other acts are excluded because they present unacceptable risks to the members of the group, due to the increased likelihood that the acts will incite a claim and/or the excessive cost to remedy the problems caused by the acts.  Excluding these acts protects the pool and its members from exposure to unacceptable risks.

2)  Policy Limits Provisions:  All E&O Policies have a limit to the amount of money which will be paid.  These limits may be for a particular claim or for all claims against one insured during the policy term.  In addition, these limits may be a combined amount or separate amounts for Defense Costs and Indemnity Costs.  This limitation is to protect the pool and its members from excessive expenditures in connection with any one claim or on behalf of any one insured.

3)  "Hammer Clause" Provisions:  Most E&O Policies have "Hammer Clauses" which allow an insurance carrier to force an insured to either settle a claim or to assume responsibility for any Defense Costs and Indemnity Costs incurred from the time the insured refuses to consent to the settlement.  These provisions are intended to protect the pool and its members from the unjustified expenditures in connection with claims which can be reasonably settled.

4)  Attorney Designation Provisions:  Most E&O Policies provide that the insurance carrier will designate the attorney who will represent the insured.  This provision is intended to guarantee the insured will receive qualified legal representation.  In addition, it is intended to protect the pool and its members from attorneys who would exploit the claim for personal gain.

These limitations may be a source of frustration for members of the pool when they are being sued.  Their frustration should be alleviated, however, if they recognize that these limitations are necessary to assure access to affordable E&O coverage.

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