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E&O covers professionals for negligence and errors or omissions that injure their clients. We recommend that all professionals have E&O coverage.
A manufacturer retained a management consultant to evaluate operational efficiencies and to provide recommendations to streamline production and reduce staffing costs. The consultant recommended a restructuring plan, which introduced a new staffing model and supply chain management process.
It took 18 months to fully implement the plan, during which several key employees resigned due to frustration with the process.
The client sued the consultant, alleging that the consultant had used unrealistic assumptions in the plan, leading to $150,000 in additional costs and $350,000 in lost profits due to the inability to meet customer demand during the transition.
The matter was resolved prior to trial and settlement as well as defense costs totaled approximately $135,000, which was covered by the consultant’s insurance for E & O.
A small construction contractor hired a consultant to perform outsourced human resources consulting services, including recruiting seasonal trades people such as electricians. As the business grew, eventually 12 electricians were hired full time during the busy season.
Because the electricians were treated as independent contractors, IRS form 1099 was issued to them yearly for tax reporting purposes.
The state labor department audited the contractor and determined that the electricians were improperly classified as independent contractors for several years. The results were shared with the IRS and the Department of Labor, resulting in enforcement actions against the contractor and lawsuits filed on behalf of the electricians, alleging they were wrongfully denied payroll benefits. The contractor sued the consultant for the costs incurred in responding to the enforcement actions, and filed cross claims for indemnification and contribution in the lawsuits filed by the electricians. The matter was litigated and resolved prior to trial. Defense costs and indemnity totaled approximately $250,000.
Thanks to the E & O insurance protection, the consultant’s legal fees and all other costs in the lawsuits were covered.
D&O covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in lawsuits against the company. There are a variety of D&O coverage components, typically consist of three core agreements – Side A, Side B and Side C:
Side A covers claims against directors and officers not indemnified by the corporation. The liability of D&O are personal liabilities, meaning if someone else won’t pay their legal bills, they’re personally on the hook.
Side B is for the benefit of the corporation. When a corporation does indemnify directors and officers, Side B provides for reimbursement of the corporation.
Side C is entity coverage. For a publicly traded company, this is for securities claims only. Privately held and not-for-profit companies enjoy more entity coverage – all risks unless specifically excluded.
EPLI (Employment Practice Liability Insurance) protects the employers for the cost of defending wages and hours violations suits filed by employees against employers,sexual harassment, discrimination, wrongful termination suits, workplace violence, retaliation and other employment-related liabilities, excluding on the job injuries.
EPLI will cover legal fees and damages for the above mentioned lawsuits and other alleged violations of employees’ legal rights. Although only about 3% of employment practices lawsuits go in favor of the plaintiff, the average cost to defend yourself in one of these lawsuits is well over $200,000. If you have employees, we recommend considering this coverage.