This material was originally presented by the author at the Insurance Law Continuing Legal Education Seminar sponsored by the New Hampshire Trial Lawyers Association on May 13, 2005.

Table of Contents

I. OVERVIEW

A. Errors & Omissions ("E & O") insurance, in the broadest sense of the term, provides "limited [liability] coverage . . . for conduct undertaken in performing or rendering professional acts or services." Medical Records Associates, Inc. v. American Empire Surplus Lines Ins. Co., 142 F. 3d 512, 513 (1st Cir. 1998) (discussing Massachusetts law).

B. The term has been applied to liability coverage for a variety of professions, including attorneys, physicians, dentists, architects, engineers, accountants and insurance agents and brokers. See generally 3 Long, The Law of Liability Insurance, Chapters 12 - 12E (Matthew Bender 2005).

C. As with all liability insurance coverage, E & O policies will be interpreted by the courts following general principles of contract law. See Shaheen, Capiello, Stein & Gordon, P.A. v. The Home Ins. Co., 143 N.H. 35, 39 (1998), citing Hudson v. Farm Family Mut. Ins. Co., 142 N.H. 144, 146 (1997). And interpretation of such contracts presents questions of law for the court. Id., citing Merrimack School Dist. v. Nat'l School Bus Serv., 140 N.H. 9, 11 (1995).

D. Regardless of the professions for which such policies are written, they generally have a number of characteristics in common:

1. They are normally "claims made," rather than "occurrence" policies. This means that they "provide liability coverage for claims that are made against the insured and reported to the insurer during the policy period." Benson v. N.H. Ins. Guaranty Assn., __ N.H. __, 864 A. 2d 359, 361 (2004). This type of coverage allows an insured to more closely match the amount of coverage purchased to the exposure likely to be experienced at the time suit is brought, rather than to some distant time in the past as with an occurrence policy. It also enables the carrier to calculate premiums more realistically. The time such an act or omission is reported to the carrier will typically determine the time when the claim is deemed to have been brought when deciding which policy may provide coverage. See Concord Hospital v. N.H. Medical Malpractice Joint Underwriting Assn., 137 N.H. 680, 682 (1993).

2. They insure the purchasers of such coverage only for claims arising out of the performance of professional services. To be fully protected for a broad range of exposure, businesses which purchase E & O coverage must also purchase other policies covering potential liability arising from general business activities.

3. Such policies typically require the insured to notify the insurer in the event he or she becomes aware of acts or omissions which may lead to a covered claim. The interpretation of such requirements is highly dependent upon the exact wording of the notice provision. See, e.g.,Shaheen, 143 N.H. at 39. All liability policies require some form of notice of an occurrence; however, there are some important differences in E & O policies which are not found in general liability policies.

4. Because of the claims made nature of such policies, most allow for the purchase of so-called "tail" coverage to protect the insured from liability for acts or omissions which may have occurred during an active professional practice, but for which a claim is not made until after he or she retires or otherwise stops practicing. Benson, 864 A. 2d, at 361.

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II. CHARACTERISTICS OF CLAIMS MADE COVERAGE

A. E & O policies typically provide coverage for "claims arising from the performance of professional services subsequent to the retroactive date indicated and first brought against [the insured] while the policy is in force." Concord Hospital, 137 N.H., at 681. The retroactive date, which sets the limit for so-called "prior acts" coverage, assumes greater significance when the insured changes carriers. During the initial switch from an occurrence policy to a claims made policy, the retroactive date was generally set at the end of the period covered by the occurrence policy. When coverage is switched from one claims made carrier to another, the new carrier typically sets the retroactive date at the end of the period covered by the previous carrier. Thus, when changing carriers, insured professionals usually find it in their best interests to report to the carrier going off of the risk any act or omission which could even be remotely imagined to lead to a claim in the future.

B. It is often important to ascertain when a claim is actually made for the purpose of determining whether it falls in one policy period or another or on the risk assumed by one carrier or another. This was the issue decided in Concord Hospital, supra. Concord Hospital reported several acts or omissions which could lead to potential claims two days before the end of the period covered by one claims made policy. The claims were not actually brought until after a different carrier went on the risk, and the old carrier argued that the claims (the word "claim" was not defined in the policy) were not made and reported until after its policy had expired. Id., at 683. The court, however, reconciled conflicting policy language in favor of the insured and held that claims would be deemed to have been made when first reported in writing to the company.Id., at 685.

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III. COVERAGE ONLY FOR PROFESSIONAL SERVICES

A. E & O policies normally contain provisions that specifically exclude coverage for certain activities. See, e.g., Mt. Airy Ins. Co. v. Greenbaum, 127 F. 3d 15, 19 (1st Cir. 1997), which upheld an exclusion for "any claim arising out of or in connection with the conduct of a business enterprise other than the Named Insured."

B. Aside from specific exclusions, such policies typically limit the scope of coverage to "[l]oss which the Insured shall become legally obligated to pay . . . by reason of any actual or alleged negligent act, error or omission committed in the rendering or failure to render the Professional Services stated in the Declarations." Medical Records Associates, 142 F. 3d , at 514.

C. One case cited on this issue by many courts is Marx v. Hartford Acc. & Indem. Co., 157 N.W.2d 870 (Neb. 1968). That court discussed the issue as follows:

The term "professional" in the context used in the policy provision means something more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for production or sale of commodities. A "professional" act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual.

Id., at 872.

D. Relying on the above-quoted passage from Marx, the Medical Records Associates court found that a company which provided copies of medical records for a fee could not look to its professional liability carrier to defend or indemnify it in a lawsuit claiming that it overcharged its customers. The court stated that "we fail to see how setting a price for photocopies and producing accurate invoices are other than generic business practices." Id., at 516.

E. In a more extreme case, the New Hampshire Supreme Court found that a dentist accused of sexually assaulting one of his patients while he was filling cavities in her teeth was not engaged in providing professional services within the meaning of his malpractice policy. Niedzielski v. St. Paul Fire & Marine Ins. Co., 134 N.H. 141, 144 (1991). Citing Marx, the Niedzielski court held that "the question of professional liability coverage is determined, not by the professional status of the actor, but by the nature of the tortious act" (Id.) And that "the scope of professional services does not include all forms of a medical professional's conduct simply because he or she is a doctor or dentist." Id.

F. The Niedzielski court distinguished the situation presented in that case from situations where therapists had used the professional relationship to "engage[] in sexual relations with their patients by manipulating the patient's emotional reactions." Id., at 145.

G. Similarly, the New Hampshire Supreme Court later held that an attorney accused of raping a client in his office after hours was not providing legal services within the meaning of his legal malpractice policy, despite the fact that "the victim may have been lured into the office ostensibly to sign legal documents." Ross v. The Home Ins. Co., 146 N.H. 468, 472 (2001).

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IV. NOTICE REQUIREMENTS

A. As previously stated, in addition to providing notice when a claim is actually made, or a lawsuit commenced, most E & O policies usually require something comparable to the following language from a legal malpractice policy:

Upon the Insured becoming aware of any act or omission which would reasonably be expected to be the basis of a claim or suit covered hereby, written notice shall be given by or on behalf of the insured to the Company or any of its authorized agents as soon as practicable, together with the fullest information obtainable.

Shaheen, 143 N.H., at 39.

B. Whether an act or omission "would reasonably be expected to be the basis of a claim or suit" is a question of fact which, in the context of a legal malpractice policy, at least, may be the subject of expert testimony. "Since the standard of care by a reasonable attorney involves questions of 'technical, or other specialized knowledge,' an expert's testimony on the reasonability of an attorney's conduct is admissible." Id., citing N.H. R. Ev. 702.

C. In Shaheen, a legal malpractice carrier argued that failure for over 18 months to report an error in drafting a prenuptial agreement violated the notice provisions of the policy and barred coverage for the suit that was later commenced. The Supreme Court noted that the applicability of the prenuptial agreement was being litigated for some time before the potential claim ripened into a lawsuit. The court refused to overturn a finding of fact by the superior court that "'only when [the attorney's arguments] failed did damages emanating from [the] oversight become a real issue, for if [the attorney] had prevailed on [his] arguments, there would have been no reasonable likelihood of a claim.'" Id., at 40.

D. The Shaheen court also noted that the client had not indicated an intention to make a claim and continued to trust and rely on the attorney up until the time that the adverse decision on the prenuptial agreement was rendered. It found that the notice provision in the policy was ambiguous because it did not "indicate whether notice to the insurer is required when all elements of a malpractice claim are present, or when, based on the parties and the circumstances, a malpractice claim on the merits is likely." Id., at 41.

E. In a case with similar facts, however, the Supreme Court later held that the notice provision in their malpractice policy was violated by attorneys who were sued by clients for failing to bring an action within the requisite statute of limitations. In that case, the trial court found that the attorneys "'were, or reasonably should have been, aware [within an earlier policy period] that the missed statute of limitations would reasonably be expected to be the basis of a claim or suit against them' and should have given notice to [the carrier] at that time". Because they did not notify [the carrier] until [a later policy had been issued], their notices were late." Bianco, P.A. v. The Home Ins. Co., 144 N.H. 288, 295 (1999).

F. While the Bianco Court did not disturb the trial court's finding of fact on reasonable expectations, it did overturn the lower court's decision in favor of the insureds made on the basis that the carrier had not been prejudiced by the delay. Unlike the situation presented by late notice in the context of an occurrence policy, the carrier which has issued a claims made policy need not prove prejudice from late notice. Horton, J., writing for the Supreme Court, said: "Claims-made policies necessarily include a presumption that the insurer suffers prejudice when the insurer does not receive timely notice of the claim during the policy period, preventing the insured from seeking coverage under subsequent policies." Id., at 296, citing Chas. T. Main v. Fireman's Fund Ins., 551 N.E.2d 28, 30 (Mass. 1990).

G. Although arising in the context of an exclusion, rather than a notice provision, the case of International Surplus Lines Ins. Co. v. Manufacturers & Merchants Mut. Ins. Co., 140 N.H. 15 (1995) is instructive on this issue. In that case, the Supreme Court refused to overturn a finding by the trial court that company officials of an insured were not entitled to coverage for a shareholder suit under a professional liability policy because, prior to the effective date of the policy they "knew or reasonably could have foreseen that their acts, errors or omissions might be the basis for claim or suit" by shareholders. Id., at 19. The Court refused to accept the insureds' argument that the exclusion should "be interpreted to require evidence that a third party is contemplating a claim against the insured" before the exclusion may be used to deny coverage.Id., at 20.

H. Most recently, the Supreme Court, in response to questions certified by the United States District Court for the District of New Hampshire, has held that an insured under a claims made policy does not comply with a policy requirement that written notice be given within the policy period if such notice is sent by overnight Federal Express the last day of the policy period, but not received by the carrier until nine hours after the policy expired. The court "conclud[ed] that the phrase 'gives . . . notice' is unambiguous and requires that the notice be received in order to be effective." Catholic Medical Center v. Executive Risk Indem., Inc., __ N.H. __, 867 A. 2d 453, 457 (2005). The court went on to reaffirm its holding in Bianco that the insurer which has issued a claims made policy need not prove it was prejudiced by the late notice. Id., at 459.

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V. TAIL COVERAGE

A. Most claims made policies allow insureds to purchase tail coverage, or "extended reporting period" coverage which will cover them for claims made after they discontinue their professional liability coverage, often because of retirement.

B. Similar to tail coverage, are provisions in professional liability policies which include within the definition of an insured former partners, employees, etc. with respect to acts or omissions during their employment with the insured entity. Thus, if the entity continues after the retirement of one of its professional members, that person continues to receive protection as an insured for acts or omissions assuming, of course, that the entity continues to purchase comparable coverage in the future.

C. A special situation is sometimes presented when a carrier which issues a claims made policy becomes insolvent. Under such circumstances, while the New Hampshire Insurance Guaranty Association ("NHIGA") may provide some protection to insureds who would otherwise fall through the cracks, its duties are limited by statute. Specifically, RSA 404-B:8, I(a) "'obligated [NHIGA to cover insureds of the insolvent carrier] to the extent of the covered claims existing prior to the determination of insolvency and arising within 30 days after the determination of insolvency . . . .'" Benson, 864 A. 2d, at 364. The plaintiffs in Benson, after retiring from the practice of medicine, had purchased tail coverage from a carrier which later became insolvent. They were notified by NHIGA that they had thirty days after the insolvency within which to report any claims; however, they were unaware of any potential claims until after that period had run. When claims were actually brought, NHIGA denied coverage. The court interpreted the statute based on the principle that tort claims arise when the tort is complete, i.e., when harm is suffered; therefore, NHIGA would be responsible for torts which occurred before the end of the thirty-day period, regardless of whether they were actually filed before that time. Id., at 366.