Documenting a Defense Against E&O Claims

Professionals who provide services to clients are routinely exposed to potential errors and omissions (E&O) claims in the course of everyday operations. Unhappy customers can quickly become claimants when they feel that their expectations have not been met. When a claim does arise, how well the professional has documented communications will play a major role in determining the outcome.

The ultimate goal with E&O is prevention, but a claim can be made or a lawsuit filed even when good defenses are in place and the professional has done everything that can reasonably be expected, or more. Thus, the real task becomes minimizing risk, which includes both preventing and successfully defending against E&O claims.

Since it is typically unmet expectations that lead to an E&O claim, documenting telephone, in-person meeting, letter or email communications is of pivotal importance for an E&O loss prevention and mitigation program. Documentation should include all communications regarding the matter at hand, and not just those between the customer and the professional.

Where people most often get into trouble is when they have had an ongoing relationship with a customer or client. During the course of everyday business dealings, a pattern of routine conversations and a level of trust may have developed. As a result, it may not seem necessary to document every interaction. This is a potential trap with respect to E&O claims.

When there is no documentation to show what communications actually took place, each party to the conversation will, at best, recall events most favorable to their position. At worst, they may make up a story to support their claim. This is especially true if the customer is feeling pressure from their employer to favorably resolve an issue. If you have an email to refer back to, and can provide your client with a copy of it at the time dissatisfaction is expressed or reference a request they thought they made, you may be able to prevent a potential E&O claim or avoid an unfavorable judgment.

A professional insurance broker, for example, has a long-time customer with a $1 million general liability insurance policy that has been renewed without any changes for the last several years. The insurance professional recognizes the customer's business has grown and recommends increasing the coverage limits and obtaining excess insurance. The customer declines, citing the cost of increasing coverage. Later that year, a company employee, while in the course and scope of his employment, causes an accident that results in the death of two people.

The claim against that customer is well in excess of his insurance limits. The customer contacts the insurance broker, claiming he asked for higher policy limits, but the coverage is only $1 million. He then files suit against the insurance broker for professional negligence (E&O) in an effort to offset the excess amount of the claim from the accident.

If the broker documented the conversation where the customer declined the additional coverage, he may have a full defense to the E&O claim. The broker is much more likely to prevail if he sent an email stating: "Per our discussion earlier today, this will confirm that we recommended you increase your liability coverage to $2 million and add an excess or umbrella policy for at least another $2 million. However, you declined to do so. We suggest you reconsider our recommendation." Without that e-mail, despite the fact that the conversation did take place (which the customer now denies), he will be in an unenviable "he said, she said" predicament, and may not be able to successfully defend the claim.

Another example further illustrates the importance of documenting communications. An attorney has represented her client, a manufacturer of goods, for more than a decade. The client calls the attorney to advise her that one of the client's best customers owes tens of thousands of dollars for products delivered, but does not want to sue the customer because of their ongoing relationship. The attorney properly informs the client of the statute of limitations for filing suit for the money owed. The balance of money owed to the client continues to rise and, after the statute of limitations expires, the client asks to know the status of the lawsuit against the customer, claiming he instructed the attorney to file a lawsuit a year ago.

If the attorney has the email to the client confirming their discussion from years earlier, she may avoid a malpractice lawsuit altogether. If not, the attorney may end up having to pay the client some or all of the amount the customer owes the client.

It is vital to document all substantive communications. If there is any doubt as to whether a particular verbal conversation involves substantive matters, err on the side of confirming the discussion in an email. The intent is to always put the ball in the other person's court by establishing your version of the discussion. If the other party does not respond with a clarification or disagreement with your version, your writing governs the terms of communication.

Similarly, if you receive an email that is not accurate, failure to respond can create the assumption that you understood-and agreed with-their version of events. For this reason, it is important to read emails thoroughly and respond as necessary, even to messages where you are not the direct recipient. This can prevent potential E&O claims altogether, or at least provide a solid defense to such claims.