Cyber risk is just one of the factors impacting errors and omissions claims, according to panelists at the American Bar Association’s annual Tort Trial & Insurance Practice Section’s Insurance Coverage Litigation Committee.
Because of a convergence of new risks facing professionals today, including technology and media liability, explained James Rhyner, vice president, global specialty E & O product manager, Chubb & Son in Warren N.J., insurers are taking a broader risk view. New modular policies start off with base of E & O coverage and include other coverages tailored to a particular professional’s business.
Darin McMullen, a shareholder with Anderson Kill in Philadelphia, described two different groups of policyholders. The first group prefers the modular approach and typically over insures their business and the second, smaller group looks at particular coverages, like cyber, and questions whether it is really needed. The second group is not mindful of insurance coverage gaps that could exist and as a result could be considered pennywise, pound foolish, he said.
It’s an educational process about what the risks truly are, Rhyner said. Professional service providers that sustain a cyber loss need to be cognizant of what their E&O policy covers. For example, he explained that first party expenses aren’t covered under E & O or commercial general liability policies.
There is limited cyber coverage under an E&O policy, said Kristine Tejano Rickard, who has experience working in claims and underwriting and is currently general counsel for Indiana-based Fuzion Analytics, Inc. Professionals should be asking questions as to what extent cyber is covered because the coverage they have might not be suited to their business.
Michael Early, assistant general counsel with the Chicago Underwriting Group for Old Republic, who prefaced his thoughts by noting that the opinions voiced by the panel during the February meeting don’t necessarily reflect those of their employers, said that professionals would likely see better coverage and pricing if they purchased cyber coverage as a standalone policy as opposed to an endorsement.
Because cyber is a newer exposure, professionals still need to get their arms around it and stay on top of the business risk, said Rhyner. In addition, he explained that it isn’t when you’ll be attacked by cyber, but how prepared you are and what steps you plan to take to mitigate it. He said he’s often met with professionals who have no incident response plan in place.
To effectively manage the risk, it’s also important that others in a business know what is offered by the company’s cyber policy, Rickard said.
Another area of increasing risk are social engineering fraud claims, said Rickard. An example is when an escrow agent holds funds on a home sale, waiting for final confirmation that the transaction closed, he or she then receives an email with wiring instructions, which looks legitimate but isn’t, asking that funds be transferred to a separate account.
These types of incidents are becoming much more sophisticated, she said. Once a system is infiltrated, hackers will wait and watch, becoming comfortable with language used in email communications in order to articulate instructions the way the parties would normally communicate. This type of loss isn’t covered under computer fraud and despite the fact that it is a security breach as defined in a cyber policy, it wouldn’t be considered a cyber claim because it isn’t considered protected information under the policy.
Besides evolving risks, the E & O market has had several carriers come and go, Rhyner said. There are unique, far ranging challenges to these consolidations, like the one between Chubb and Ace, he said. As an example, there were seven carriers that either retrenched or pulled out of the lawyers’ professional marketplace recently. This leads to higher rates and less choices for professionals seeking coverage, he said.
According to Early, these changes affect claims and coverage claims are on the uptick. “Loyalty to the customer may be questioned as they exit marketplace,” Early said.
In addition, carriers may be quicker to decide there is no coverage and quicker to litigate the issue, McMullen said. This may be a result of a reduced concern about losing business through a coverage dispute because of the decision to exit that line of business.