Professional Liability Coverage for Knowing, Intentional and Criminal Acts

This article was originally published in The Corporate Cousel, June 2010.

Professional liability policies (also commonly known as "errors and omission" or "E&O" policies), typically cover claims arising out of any "wrongful act" or "any negligent act, error or omission" in connection with the policyholder's performing a professional service. They also often include an exclusion for some combination of knowing, dishonest, fraudulent, intentional, or criminal acts. Insurance companies typically seize upon any allegation of intent or knowledge on the part of their policyholders to avoid coverage.

This issue often arises where a claimant sues the policyholder for a number of tortious acts, ranging from negligence to recklessness to intentional misconduct. Most cases hold that the claim is covered based upon the presence of the negligence claims. The issue can then become one of allocation: to what extent is coverage afforded for the cost of defending or settling the entire action? There is a split among the states. The majority view is that if any claims are potentially covered, a policyholder is entitled to reimbursement of defense costs for the entire action. A minority of courts hold that the policyholder is only entitled to reimbursement of those defense costs associated with potentially covered claims.

Another issue arises as to whether mere allegations of dishonest, fraudulent, intentional, or criminal conduct trigger the exclusion. Often, the exclusion states that it only applies where the dishonest, fraudulent, or criminal conduct has been finally adjudged in a court of competent jurisdiction. Under such circumstances, "final adjudication" should mean the exhaustion of all appellate rights. Further, there may be an issue as to whether "final adjudication" can be avoided by settlement before any adjudication reaches the stage of "final." Arguably, claims of criminal or fraudulent acts which are never established through "final adjudication" because of a settlement should require the insurance company to indemnify.

Should The Exclusion Even Potentially Apply?

As a preliminary matter, however, policyholders should not casually accept an insurance company assertion that any reference to knowledge, intent or a crime means that at least some portion of the claim is potentially not covered. It is important to distinguish between an intent to commit an act on one hand, and an intent to cause the harm caused by the act on the other hand. In many...