E&O, D&O insurance can be good option

Risk managers should consider whether errors and omission (E&O) or directors and officers (D&O) coverage is right for the organization's executives, particularly in light of the changing coverage limitations in typical insurance policies, say those familiar with these insurance options. Most health care providers should purchase this coverage, experts say.

E&O is designed to cover claims that result from the negligent acts or mistakes of an agent, including his or her vicarious liability stemming from negligent acts or mistakes committed by individuals for whom the agent is legally liable. D&O insurance protects directors and officers against personal liability for losses incurred by a third party due to negligent performance by the director or officer. D&O can cover legal expenses and liability to shareholders, bondholders, creditors, or others due to actions or omissions by a director or officer of a corporation or nonprofit organization.

E&O and D&O are designed to limit exposure for the individual and the organization in the event that someone makes a mistake in performing their duties, explains Kitt Turner, JD, an attorney with Eckert Seamans in Philadelphia. The coverage is often seen as a perk for high-level executives and therefore not strictly necessary, but Turner says that can be a shortsighted approach. "D&O insurance in particular should be seen as a cost of doing business if you want to attract the best and brightest to your organization," she says. "Those directors and officers want to know they have protection when something goes wrong, and something always goes wrong eventually."

With a for-profit entity, a primary worry is a shareholder bringing a lawsuit that alleges the director breached a fiduciary duty, Turner explains. In a nonprofit organization, similar charges can arise, but they won't come from shareholders, but originate instead with the attorney general or a creditor, for instance. Most state laws permit indemnification of directors and officers against claims as long as the wrongdoing was not intentional, Turner says. "So insurance is a way for the company to meet its indemnification obligations even if the company becomes insolvent," she says. That's what directors and officers are looking for, Turner says. "They know that when something goes wrong, people look to assess fault and blame, and they don't want to be left holding the bag," she says.

R. Stephen Trosty, JD, MHA, CPHRM, director of risk management for American Physicians in East Lansing, MI, says with recent changes in the way insurance is written, with more exclusions and ways for providers to be left liable, nearly all health care providers should have E&O and D&O coverage. "Hospitals and health care institutions should have these policies to cover, at a minimum, the board of directors and administrators and managers," Trosty says. "Those are the individuals who can be the subject of allegations regarding errors and omission, or deviations from their duties as officers."

Directors are usually defined as members of the board, and officers are usually people authorized to make major decisions on behalf of the corporate entity, he explains. Peer review committees also should be covered by these policies, Trosty say. With that coverage, they are protected when they make recommendations or decisions regarding a physician's privileges, which could prompt a lawsuit.

The more your health care organization is involved in complex financial arrangements with other entities, purchasing and selling units, the more this coverage is needed, Turner suggests. If your organization is relatively self-contained and not involved in such operations, it might be OK — but still a little risky — to forgo this coverage.

"If you're at a small community hospital that's not doing much of anything transaction-wise, just operating a hospital, then maybe you can get by without this coverage," she says. However, if you're dealing every day with mergers, acquisitions, and growth strategies, you have the possibility of something going wrong, Turner emphasizes. "You could make an acquisition and find that the company had more debt than you thought, and suddenly you have a problem on your hands," she says.

Another question is whether the company is adequately capitalized. If it is thinly capitalized, there is the risk of directors and officers making a mistake from which the company cannot recover, and the coverage could come in handy. But on the other hand, if the company is that thinly capitalized, it could have trouble getting D&O coverage, Turner says.

This type of coverage can help executives keep their mind on the business at hand instead of worrying about being sued, she says. Furthermore, if a lawsuit is brought, it can help the organization avoid significant liability.

Turner notes that the costs for this coverage can vary widely depending on particulars of the organization, the insurer, and market conditions. The price tends to bounce up and down depending on whether a big D&O or E&O case has been in the news lately. If so, the price tends to go up for a while. "The legal fees to defend yourself in a directors and officers' lawsuit can be phenomenal," she says. "The cost of the insurance always looks like a bargain in hindsight."

Sources

For more information on directors & officers (D&O) and errors & omissions (E&O) coverage, contact:

  • R. Stephen Trosty, JD, MHA, CPHRM, Director of Risk Management, American Physicians, East Lansing, MI 48826-1471. Telephone: (517) 351-1150, ext. 6808. E-mail: strosty@apassurance.com.
  • Kitt Turner, JD, Eckert Seamans Cherin & Mellott, 1515 Market St., Ninth Floor, Philadelphia, PA 19102-1909. Telephone: (215) 851-8431. E-mail: kturner@eckertseamans.com.

E&O, D&O must be reviewed and updated often

Once you've purchased errors and omission (E&O) or directors and officers (D&O) coverage, that doesn't mean you're finished with addressing this issue. The coverage must be reviewed and updated on a regular basis, advises R. Stephen Trosty, JD, MHA, CPHRM, director of risk management for American Physicians in East Lansing, MI.

When first obtaining this coverage, Trosty says risk managers should first do an organization wide assessment of what tasks executives and administrators are engaged in and which ones might lead to the type of allegations covered by E&O and D&O. That task provides a first assessment of who needs coverage. This step is important because you want to cover everyone who is at risk, but you don't want to pay to insure others, Trosty says.

"You don't want to cover more people than necessary because it's going to cost you money," he says. "So you have to identify exactly who does what and decide who should be covered, as well as how much coverage you should have."

Once you do that and obtain coverage, it will be necessary to go through the whole process periodically, perhaps yearly, to see if changes are needed. As people move in and out covered positions and their duties change, it may be necessary to update the E&O and D&O coverage specifications.

"You don't want to keep paying for coverage for someone who doesn't need it anymore, and you certainly don't want to have a claim arise and find out then that you never added that new hire to the coverage," Trosty says. "It also is necessary to take a new look once in a while at what activities your organization is involved in, any mergers and acquisitions, and see how that affects your coverage and how much coverage you need."