Q&A: Do E&O Policies Cover Contractual Liability?

We recently fielded an inquiry from a customer regarding E&O policies and contractual liability. We see two common definitions of contractual liability, as described below. In both cases, for the question in the headline, the answer is probably no.

Surety

One common definition is a Surety, i.e.— insuring that a contract will be performed. Errors and omissions policies are not designed to fill this function.

Assumption of Liability Via Contract

The other common definition involves assumed liability, i.e.— insuring liability that is assumed in a contract. Errors and omissions policies often exclude claims for breach of express or implied contract. Now, if liabilities insured under the insurance policy happen to coincide with a liability that is assumed by the insured via contract with another party, then one could say in a loose sense that there is contractual liability coverage. But that coverage really exists by virtue of the insurance policy alone. In fact some E&O policy forms may explicitly state that liability assumed under contract is excluded unless the liability would have been incurred without the contract. Either way, in the event of a claim, the insurance policy provisions would be analyzed for coverage, not the Insured’s contract. In fact, in light of an exclusion for breach of contract within the policy provisions, the contract would have no bearing on the analysis at all.