Errors and Omissions Policy: Do You Know What You’re Buying?

For as long as I can remember, people like me have been telling people like you about the importance of obtaining an errors and omissions insurance policy for your business. If just one jury believes that you should have checked this reference or verified that degree before referring a candidate, you can be hit with a verdict large enough to literally bring your business to an end. Even if you are “successful” in the litigation, the legal costs alone can be suffocating.

However, just purchasing an errors and omissions insurance policy may not give you the protection you think you are buying, even if the policy purports to be specifically designed for members of the staffing industry.

Take a look at these two cases in which I have recently been involved:In the first case, the client claimed that the placed candidate had lied on his resume (passed along by the recruiter) about his date of graduation from college and his salary. When the client learned this, it first fired the candidate and second, sued the recruiter for return of its $34,000 fee and damages in excess of $100,000. While the insurance company, Legion Indemnity Company, was willing to defend the action and insure against the claim (with the exception of the claim for the refund of the fee, which is usually not covered by an errors and omissions policy) this commitment has not helped the recruiter much, since Legion Indemnity has gone into liquidation, sort of an insurance company’s version of Chapter 11 bankruptcy proceedings.To stop the claim, and legal fees, from getting out of control, we worked out a settlement where the client agreed to pay a very small portion of the claim over time, and the plaintiff agreed to take its chances with the insurance company directly as to the larger portion of the settlement.

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Lesson One: If the company from whom you are buying your policy is not clearly a stable one, you will get no benefit from the fact that you might be paying slightly lower premiums than are required by its competitors.Another case may be more alarming, however, because it involves a position taken by the most well known errors and omissions carrier for the staffing industry. In this latter case, the recruiter placed a legal secretary, who subsequently (allegedly, of course) forged her employer’s signature on checks issued to the employer by various clients and converted the funds to her own benefit. The recruiter was sued by its client and confidently turned the matter over to the American International Group of Companies, from whom the recruiter had purchased that company’s well known and heavily advertised “Staffing Services Liability Policy,” offered by National Union Fire Insurance Company. Although you might believe, as do I, that the claim in this case represents a classic example of the type of matter that would be covered by an errors and omissions insurance policy sold to a recruiter, apparently American International Group disagrees. It has denied coverage based on a provision in the insurance policy which excludes coverage for “any theft, burglary, robbery, mysterious disappearance, inventory shortage or inventory shrinkage. Further, no coverage shall be provided for any direct or consequential damage resulting from or contributed to by any of the foregoing. “The recruiter has argued that the purpose of this exclusion is to prevent the recruiter from recovering for theft by itself or any of its own employees. This is not a case of theft by the recruiter, but a case in which the recruiter is accused of negligence. However, at this point, it does not matter what the recruiter thinks or I think. American International has denied coverage, and that denial has survived the company’s internal appeals process. The recruiter may eventually succeed, through even more litigation, in obtaining coverage from American International’s company, but in the meantime, legal fees are into five figures and growing by the day.

Lesson Two: You should not purchase errors and omissions insurance without comparison shopping. Do not only compare the premiums, compare the companies’ reputations for denying coverage for all sorts of unexpected reasons and, perhaps most important of all, read the policy to see whether you are in fact covered for the kind of claims most likely to occur in your business. Better yet, have an attorney who knows about what you do for a living compare the policies for you.The premiums for your errors and omissions policy are rapidly increasing. While this type of insurance coverage is indispensable to every placement firm, it will not do you any good if it does not cover, or if the insurance company maintains it does not cover, the risks which you encounter in your business. Make sure that you have received comfort from your own reading of the policy, or the reading of an expert, and/or the advice of your broker or carrier, that you are in fact covered if your candidate lies, cheats, steals, or otherwise does damage to your client, and you are accused of not having done everything within your power to stop it.

Robert P. Style was a well-known attorney specializing in the search and placement industry for nearly 40 years. He served as General Counsel for the National Association of Personnel Services from 1977 until 2011. Mr. Style authored "The Certified Personnel Consultants' Legal Manual" and co-authored "Temporary Help Service Operations: A Legal Manual." He was a graduate of the University of Pittsburgh Law School in 1968 where he was Editor-in-Chief of the University of Pittsburgh Law Review. Mr. Style passed away on July 18, 2011.

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