Monday, November 7, 2011

Errors and Omissions

Errors and Omissions is a concept that is found most frequently in construction design or building contracts but it can apply to any area that could involve professional liability.

Errors and omissions requires two basic things. First there must be a duty to perform. Second the supplier must fail to have met that duty by either having an error in the performance of that duty or the omission to perform that duty. If either the error or omission causes damage or injury the professional could be found liable for that error or omission.

The duties that the supplier is required to perform could be duties specifically stated in the contract or they could be duties that the party has as a matter of public policy. For example, an architect or engineer has a duty as a part of public policy to design or buildings or structures that are safe. The agreement doesn’t need to require that.

In many agreements that could generate professional liability, buyers may include two elements that set up potential errors or omissions claims. One is a statement that the supplier is an expert. The second is that the buyer is relying on the supplier’s expertise. What those two concepts do is try to include the implied warranty of fitness for a particular purpose. What they are also intended to do is establish a very high standard for the performance of the duty. Instead of being measured against what would be reasonable for a general company, their performance will be measured against what would be reasonable for an expert in that field.The second is to disclaim
any internal knowledge or ability the buyer has about the subject matter by stating that they are relying upon the supplier.

If you purchase services that could involve errors and omissions where the potential damages could be substantial, you should consider requiring the supplier carry errors and omissions (E&O) insurance. Most companies that do business in areas where there could be professional liability should already carry an E&O policy so there should be no additional cost to you unless you are demanding a higher limit.

What E&O insurance coverage provides the buyer is an additional level of financial protection. In the event of a claim against the Supplier the E&O coverage acts like a deductible. For example if you had a $5,000,000 E&O policy and a $10,000,000 limit of liability with the supplier and you sustained a $16,000,000 loss, the payments would be as follows. The first $5,000,000 less any deductible would be paid by the insurance. The next $10.000,000 which would include the amount of the deductible would be paid by the supplier. Any amount over that would not be recovered. Where E&O coverage is particularly important is when the supplier may not have the financial assets on their own to cover the loss.

For errors and omissions to work, the buyer’s team needs to understand that instructions or requirements they give the supplier could impact the ability to collect if those instructions or requirements are in any way connected to the error or omission. One of the ways that I’ve seen that managed contractually is to say that the buyer has the right to make "suggestions". The supplier can either accept or reject those suggestion. If they accept the suggestion it will be treated as if it was their own. That way the supplier will need to use their skill and expertise to determine if the suggestion was appropriate for their use..

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