E&O: Who’ll defend you?
E&O: Who’ll defend you?
Say you’re sued and the type of claim involved isn’t covered under your errors & omissions insurance. Tough luck? Not necessarily. E&O carriers may have to help you defend against mold and other excluded claims.
In today’s increasingly complex world of real estate transactions and with the proliferation of regulations and disclosure requirements, E&O insurance is an essential part of doing business. It provides a first line of defense against legal costs and potential liabilities that arise when a client or customer sues you.
Of course, most E&O policies include a list of exclusions incidents or activities that aren’t covered by the policy. Common exclusions include fraudulent or criminal acts by the insured; discharge of or failure to identify pollution, mold, or other environmental issues; misappropriation or commingling of funds; and discrimination. If a coverage is excluded, the insurer won’t pay for any judgments against you related to that area. If you lose in court, you alone will have to bear the costs.
Yet, you may have some recourse under your E&O policy. Courts have long held that an insurance company’s duty to defend its policyholders is triggered when the insurer is made aware of allegations or facts that give rise to a potential claim that is covered under the policy. Those facts can take the form not just of lawsuit charges but also of documents received from the other side and oral statements. The insurer’s defense can be provided as money or as an attorney for the trial and any appeal.
In McCostis v. Home Insurance Co. of Indiana 31 F.3d 110, 112 (2nd Cir. 1994), a New York court found that a lawyer who was sued for fraudulent overbilling was entitled to a defense under his professional liability insurance policy despite a policy exclusion for “return . . . of legal fees.” The court made this decision because the complaint also charged the lawyer with a negligent breach of fiduciary duty. Because his E&O policy required the insurer to defend the lawyer for negligence, it was obligated to defend him at the trial, which involved both charges.
Similarly, in Church Mutual Ins. Co. v. U.S. Liability Ins. Co. 347 F.Supp.2d 880 (S.D. Cal, 2004), the U.S. District Court ruled that an exclusion of claims for breach of contract didn’t bar coverage for fraud under a nonprofit professional liability policy.
Note that, in general, the defense requirement doesn’t necessarily mean the carrier must also pay any claims if the real estate practitioner loses the case.
Potential for coverage
In general, real estate practitioners facing claims that may be excluded from an insurance policy may not have to demonstrate the actual existence of coverage to obtain a defense from an insurer. Rather, they must show only the existence of a “potential for coverage.” Although what exactly constitutes potential for coverage is open for debate in legal circles, there’s a test that can help determine whether potential for coverage exists. There’s no potential for coverage, and thus no duty to defend, if the undisputed facts available to the insurer at the time of coverage are sufficient to allow the court to rule against the insured. If this test is met, an insurer can safely deny a defense (Montrose Chemical Corp. v. Superior Court, 6 Cal 4th 287, 297, 300, (Cal. 1993). However, if subsequent facts elicited during the course of litigation reflect a potential for coverage for any claim in the suit, the insured should re-approach the carrier about the case.
Thus, if the case of the lawyer described above had involved charges only of fraud which were excluded by the policy the insurer would have had no duty to defend. However, since the charges included both fraud and breach of fiduciary duty, the insurer was obligated to cover at least part of the lawyer’s defense.
Real estate practitioners may also be able to get an insurer to defend against excluded claims as part of a larger suit. For example, mold related claims are frequently joined with other issues that have nothing to do with mold and that in and of themselves may require a carrier to defend the entire lawsuit. As an example, the California Civil Code requires a real estate licensee to conduct a visual inspection of residential real property and disclose any observable problems. In such a case, a mold claim might be part of a suit against a licensee for failing to properly inspect a home and disclose the visual presence of mold or water leaks.
Because an insurer may have an obligation to at least defend a lawsuit in which excluded claims such as those based on mold or fraud are joined with other covered issues, you should immediately put your professional liability insurance carrier on notice from the date you first become aware of a possible malpractice claim against you. If the carrier denies coverage by virtue of policy exclusions, consult your defense attorney as to whether you have some protection available and, if so, ask your attorney to put the insurer on notice of its obligation to you.
You may not ultimately be covered, but because many cases involve more than one charge, you may find that your insurer will be compelled to provide a defense that will help you prove your innocence.