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FAQ: Increasing and Decreasing E&O Insurance Policy Limits

Monday, March 24, 2014/Categories: errors-and-omissions

Many tech owners purchase higher limits on their errors and omissions insurance because their client contracts require it. But what about when those contracts expire? Is it a good idea to save a little money by reducing your professional liability policy limits? Or, what if you already have coverage, but a new contract requires a higher policy limit? Can you increase coverage in the middle of the annual policy term?

We answer these and other frequently asked errors & omissions questions below.

Is coverage fixed for an annual period, or can I modify my policy limits during the year?

Policy limits can often be adjusted during the year, though some insurance companies have restrictions regarding this. As a rule, they are willing to increase the limits due to contract requirements, but may request a copy of the contract. Their concern is that your request to increase your coverage amount may be related to an incident that has already occurred, and they do not want to increase the amount of coverage when there is already a potential or pending claim.

If I want to increase and decrease E&O insurance coverage based on what my contracts say I need, is the coverage limit based on when I delivered the project, or when a suit is brought? If I decrease coverage after the contract ends and am later sued, am I covered based on the level I had at the time I did the work, or on the level of coverage at the time I'm sued?

If coverage is reduced, the claim will be handled based on the amount of coverage in force when the claim is filed, regardless of how much coverage was in force when the work was done. In some cases, when coverage is increased in the middle of the policy term, the carrier will treat claims that occurred prior to the date change as covered under the lower limit, and those events that occurred after the increase as covered with the higher limit. Again, this is to protect against increasing coverage when there is a potential or pending claim that has not yet been filed.

If I move E&O coverage limits up and down, could the carrier deny me future coverage or drop me?

Probably not. Although making multiple changes in the course of the same policy term is very unusual, it is generally not a cause for non-renewal. However, as a rule, it is best to maintain a consistent level of coverage during a single policy term, unless a contract specifically requires an increase. Changes in coverage limits are best handled at the policy renewal.

If I reduce my coverage or completely let it lapse, would it be harder to later increase or reinstate my coverage?

You should always be able to start a new policy, as long as the previous policy was not canceled for non-payment of premium. E&O insurance policies are written on a “claims-made” basis. That means that coverage must be in force when the event occurred, as well as when the claim is filed. With few exceptions, once an E&O policy lapses, all coverage is lost, and it is as if you never had insurance. When your policy lapses and a new policy is started, the new policy will only cover work that is done after the new policy’s effective date. There is no coverage for work that was done prior to that date, even though you might have had coverage in force at that time.

How do I determine how much errors and omissions coverage I need?

It is difficult, if not impossible, to predict exactly how much errors and omissions coverage you might need under future circumstances. When helping you determine limits, we assess your exposure to risk based on the size of the contracts you work on – small contracts typically suggest lower maximum liability – and how mission-critical your services are to the client. For example, you might be working on a small project, but a failure could result in your client being unable to process business orders or do payroll. Depending on the size of the client, the financial loss could be substantial. In general, $1 million in coverage is the most common amount required by contracts and is the amount we suggest most often.

Contact your TechInsurance representative for help with determining or adjusting your insurance limits for professional liability coverage, as well as establishing property limits, casualty limits and umbrella policy limits appropriate for your business.

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