Clients with whom you work closely might sue you. The action might result because they think that your professional services harmed them. In most cases, the lawsuit will list an amount for which they want compensation. It is up to the court process to resolve this lawsuit, and sometimes, you might have to pay the affected party. That might involve paying punitive damages.
You might wonder if you have any help from your E&O insurance to cover punitive damage costs. Let’s examine it a little closer.
E&O Insurance Risks
Errors & omissions coverage is liability insurance. It applies when your professional services or advice cause another party harm. For example, a financial adviser might give a client incorrect information, and they could suffer a financial loss as a result. They might sue. An E&O policy might cover a lot of the resulting legal costs. However, not all legal costs will have coverage.
E&O Coverage and Legal Costs
E&O lawsuits could take a lot of different courses. Sometimes, the case will go to court. If the court awards a judgement to the affected party, you will then have to pay these costs, by lawful order.
Your E&O policy might pay for some or all the judgement costs. It might also help you pay other costs such as lawyers fees or lost income for time spent in court. However, if a court orders you to pay punitive damages, your E&O coverage likely won’t help you.
Understanding Punitive Damages
Punitive damages are, in simple terms, extra fees leveled against a defendant in a suit. A person suing your business might not ask for these costs in their lawsuits. However, the court could feel that they deserve them.
The court might level these fees because they find that the defendant’s conduct was exceptionally dangerous or negligent. In other words, if the court finds that your actions were far and away incorrect, it might essentially decide to make an example of you. Punitive damages might provide extra help to the affected party. In one way, this is a way to deter you from committing the same act again.
The reason E&O policies won’t cover punitive damages depends, in part, on interpretations of the law. Again, punitive damages are something of a punishment. In your E&O case, punitive damages might basically serve to make an example of you. Therefore, you will have to pay them. Rhetorically, if your policy were to pay, then that might defeat the purpose of the punitive damages.
Laws and legal opinions vary greatly when it comes to punitive damages. So, too, might E&O policies. So, if you do face the prospect of these, consult closely with your lawyer and insurance company. Both can work with you to better understand your obligations.
Also Read: When E&O Insurance Will and Won’t Apply in Your Law Office