May Breakfast Meeting Recap
Drew Mitala, USLI
Thursday, May 19
UPDATE ON THE E&O and D&O MARKETS
On Thursday morning, May 19, 2005, chapter breakfast meeting attendees heard a panel session on E&O and D&O. Recap by Donna Popow:
The May breakfast meeting featured a presentation by Drew Mitala, RPLU, and Mark Peikin, Esq. on the trends and developments in Errors and Omissions insurance. Drew is Vice President of Professionals Lines for U.S. Liability Insurance Group and Mark is with the law firm of Cozen O’Connor. As V.P. of Professional Lines, Drew is well acquainted with the issues facing underwriters in the E&O market. The E&O market is a challenge for underwriters because of the lack of data available on E&O risks for areas other than lawyers, architects and engineers, and medical providers. Additionally, the E&O underwriter must learn about hundreds of classes of business, be well versed in many different policy forms and be able to explain why the rates are so different from another. Even with these challenges, Drew feels that E&O is a developing market.
Pricing is a particular challenge for underwriters. It is primarily based on judgment since there may not be a sufficient amount of historical data. This condition is particularly true of start up companies. Start up companies also present a challenge when trying to determine what is their actual exposure. Drew suggests viewing the company website to see if the application submitted is consistent with the website and to see if they are making any guarantees on the site that will be a potential exposure.
Drew finds that most buy E&O insurance for only a few reasons. These reasons include (1) fulfilling contractual requirements (2) being held to a higher standard of care (3) increased media overage, protecting the existence of the insured (4) significant defense costs (5) and the GL exclusion for professional services. In order to underwrite an E&O risk well, Drew suggests that the underwater treat every risk as a unique opportunity. By treating each risk on its own merits, the underwriter will develop an expertise in a particular type of E&O insurance and be able to offer a tailored product to the applicant.
As a lawyer involved primarily in the defense of financial institutions, Mark Peikin has a slightly different perspective on Errors and Ommissions. Mark sees E&O claim increasing in both severity and frequency. He also sees an increase in securities class action suits and government investigations, all impacting E&O insurance. Mark did a walk through of some of the basic elements of E&O insurance and then discussed several recent cases of significance.
The definition of professional services has been broadened by the court in the case PMI Mortgage Ins. Co. v. Am. Int’l Spec. Lines Ins. Co., 394 F3d 761, a 2005 Ninth Circuit decision. In this decision the court broadened the definition of professional services to include allegations of kickbacks against the mortgage insurer because the allegations arose from the conduct of the insurer’s business.
In the cases of Level 3 Comm. Inc. v. Federal Ins. Co. 272 F3d 908 (7th Cir. 2001) and Conseco, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA , 2002 WL 31961447 (Ind. Cir. Ct. 2002) the courts determined that payments made by the insured to resolve securities claims under sections 11 and 12 of the Securities Act of 1933 ( having to do with misleading statements made in offerings materials) are not an “insurable loss” under the policy when the payments actually are the return of ill gotten gains.
In the case of TIG Specialty Ins. Co. v. Pinkmonkey.Com Inc., 2004 WL 142993 (5th Cir. 2004) the court held that the personal profit exclusion barred coverage for an action against a CEO who personally profited from the fraudulent sale of stock. And in the case of Burlington Ins. Co. v. Okie Dokie Inc., 329 F. Supp.2d 45 ( D.D.C. 2004) the court held that an insurance broker could be sued for the mis-statements made by the applicant in the application for insurance.
As a result of these and other cases like them, Mark sees an increase in E&O claims against brokers as well as increasing dispute as to what is covered by the GL policy and what is covered by the E&O policy.
Both speakers finished by responding to questions from the meeting attendees and supplied handouts of their presentations.
