Chapter 10 Errors & Omissions 1
ERRORS & OMISSIONS INSURANCE
FOR SCHOOL BOARD MEMBERS
Georgene M. Wilson, Esq.
SWEENEY AND RIMAN, LTD.
230 W. Monroe Street
Chicago, Illinois 60606
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As our society becomes increasingly litigious public and private entities are seeking ways
to reduce the personal risks of the members of their decision-making boards. Often time,
especially in the public sector, suits will be filed against board members, administrators and
employees in an effort to accomplish a personal goal. This increase in legal exposure has
resulted in public entities, including school districts, providing insurance protection to its board
members, administrators and employees through errors and omissions policies. These policies
however, must be carefully examined to determine the type and scope of coverage contained in
This article will focus on the legal duties which board members incur while conducting
the school district’s business, the usual coverage provided by errors and omissions or School
Board Legal Liability Policies, exclusions which are often contained in the policies, and the
duties of the insurance carrier in the vent of a claim. As with any insurance policy there are
additional endorsements and declarations which a school board may elect to include and which
may broaden or constrict the cover age provided by the policy. Risk managers should carefully
examine the policy, endorsements and declarations as well as work closely with their insurance
agents in determining if the errors and omissions policy being offered meets the district’s needs.
Most importantly, the school board members themselves should have a good understanding of
the coverage provided by the policy, the requirements which the policy imposes to trigger
coverage, and what, if any, personal risk they are undertaking while conducting the school
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DUTY OF SCHOOL BOARD MEMBERS
In private corporations the decision-making body for corporate action is the Board of
Directors. The members of the Board of Directors are elected by the shareholders of the
corporation and the board members must act in the shareholder’s best interest when making
decisions. School boards operate in much the same fashion as boards of directors of private
corporations. School board members are elected by the voters of their school district and re
charged with making decisions which are implemented by administrators and employees of the
school district. School board members have a duty to the citizens of their district to make
decisions which are in their and the school district’s best interest.
Because school board members, as publicly elected officials, are charged with carrying
out the public trust, they owe a fiduciary duty to the citizens which elected them. County of
Cook v. Barrett, 36Ill.App.3d 623, 344 N.E.2d 540 (1st Dist., 1995). A fiduciary duty is a higher
duty with school board members owing the citizens of their districts a duty to make decisions
with loyalty and good faith to the citizenry. ld.
In addition to the fiduciary duty created by the common law, school boards are also
governed by statute. School board members must faithfully carry out their fiduciary and
statutory obligations while making complex decisions concerning the operation of the school
district. The failure of school board members to meet either of their common law or statutory
obligations may result in lawsuits against board members individually which could result in
board members incurring personal liability.
The potential personal
exposure is expansive due to the wide range of decisions made by school boards. School board
members face being named individually in suits arising from employment decisions, civil right
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violations, educational deficiencies, financial decisions, and administrative matters. In addition,
school board members may face personal liability for breach of contract actions or, in certain
instances, personal injury actions.1
Errors and omissions or School Board Legal Liability insurance policies are intended to
provide coverage for individual board members, as well as the district, in suits alleging breach of
fiduciary duty in carrying out the districts business. The issue, which arises with School Board
Legal Liability policies, is the extent of coverage.
Although many claims against school districts and school board members are meritless
and do not result in a judgment or payment of monies to the plaintiff, the defense of these cases
entail payment of legal fees and costs which can become expensive. Accordingly, when
purchasing an E&O policy, the district should seek the broadest coverage possible.
DUTIES OF INSURANCE COMPANIES GENERALLY
When coverage disputes arise the courts look at the terms of insurance policy and interpret them
using traditional contract construction rules. Scottish and York International Insurance Group v.
Comet Casualty Co., 207 Ill.App.3d 881 (1990). The insuring agreement is interpreted as a
whole and because the intent of the insurance contract is to provide coverage, the court will
broadly construe the policy to accomplish that intent. Equity General Insurance Co. v. Patio,119
Ill.App.3d 232 (1991). Coverage will only be limited by exclusions contained in the policy if the
application of the exclusions to the claim is clear and free from doubt. U.S. Fidelity & Guaranty
School districts and school board members enjoy some protections from personal injury actions
based upon the statutory immunity granted by the Local Governmental Tort Immunity Act. This article
does not address insurance coverage issues for tort based actions. Despite the immunities granted by the
Local Governmental Tort Immunity Act, in certain instances school districts and individual may be subject
to liability for personal injuries to their parties. As personal injury coverage is generally excluded from
School Board Legal Liability policies, the risk manager for the district should examine the general liability
and coverage B of the worker’s compensation policy to determine if there is cover age for board members
if they are named as defendants in personal injury actions.
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Co. v. Wilkin Insulation Co., 193 Ill.App.3d 1087 (1989). Because insurance policies are
generally forms which are used throughout the country, the language used is often broad and,
therefore, more easily subject to an argument that the terms are ambiguous. Ambiguities are
interpreted against the drafter of the contract, thus, ambiguities in insurance policies are
interpreted against the insurance company and in favor of coverage for the insured. Outboard
Marine Corp. v. Liberty Mutual Insurance Co., 168 Ill.App3d 361 (1988).
In Illinois the courts have held that an insurance company has two duties under an
insurance policy. The insurance company has a duty to defend and, if there is coverage for the
loss, a duty to indemnify. The duty to defend is broader than the duty to indemnify and it arises
when a suit arguably falls within the terms of the policy. Economy Preferred insurance Co. v.
Grandadam, 275 Ill.App.3d 866 (1995). Thus, when the claims being asserted in a suit could
potentially fall within the coverage of the policy, the insurance company must defend. If the
insurance company denies the claim and the courts later find that the company has breached its
duty to defend, the insurance company is prohibited (in legal terms: estopped) from denying
coverage regardless of the policy language which means that the insurance company must pay all
defense fees, costs and any judgment.
These rules of construction are important when examining the terms of the E&O
insurance policy because they go to the heart of the financial risk being assumed by the school
board members. The broader the policy definitions and coverage, the more compelling the
argument that the insurance company must at least pay the defense costs of a suit. The goal of
the school district and board member is to have all claims based upon decisions made by the
school board in its official capacity be covered by the E&O policy. At a minimum, suits based
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upon breach of fiduciary duty should be covered. Thus, broad E&O coverage minimizes the
personal liability of the individual board members.
THE TERMS OF SCHOOL BOARD LEGAL POLICIES
Generally, School Board legal Liability policies contain the following: “insuring
agreement”, a section on “defense and supplementary payments”; limits of liability; definitions;
exclusions; condition; the insured’s responsibilities in the event of a claim; and notice
The Insuring Agreement ENUNCIATES WHAT TYPES OF CLAIM THE
INSURANCE POLICY COVERS. Usually the insuring agreement provides coverage for
CLAIMS against the INSURED for WRONGFUL ACTS which occur during the discharge of
the duties of the EDUCATIONAL ENTITY. Generally, School Board Legal Liability policies
are CLAIMS MADE policies.2 Wrongful acts generally include claims based upon negligence;
reach of fiduciary duty; and, errors and omissions in carrying out the school district’s business
including extracurricular activities.
Claims Made Policies:
A “claims made” policy is one which covers only those claims which are actually made
during the year in which the insurance policy is in effect. Generally, insurance policies are
The capitalization used in this paragraph denotes terms which usually have specific
definitions in the insuring agreement. When examining a policy to determine the coverage
provided, the risk manager must have a clear understanding of the how terms are defined in the
policy as it may differ from the commonly understood meaning of the words used. In a suit to
interpret the insurance policy, the definitions contained in the policy will be used by the courts in
determining if there is coverage for the claim and what the scope of the coverage is under the
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effective for one year and renewed annually. In a claims made policy, the trigger date for
invoking the policy is the date that the claim is made not the date that the act which gives rise to
the claim occurred. A school board could make a decision in one year and be sued the following
year. Under a claims made policy, the insurance policy which is in effect when the lawsuit is
brought provides the coverage. Because the filing of the suit triggers coverage, care must be
taken to immediately notify the insurance company of a claim.
In many policies the only claim which is covered is a lawsuit filed in a court of law. This
narrow definition excludes coverage for administrative hearings and arbitration proceedings.
Thus, the individual board member, not the insurance company would be responsible for defense
costs in non-court proceedings. If a school district has many contracts which contain mandatory
arbitration proceedings, or if the district is concerned about responding to government
enforcement proceedings, the School Board Legal Liability policy should be examined to
determine if these types of proceedings are covered.
The definition of wrongful acts is often broad and may include actual and alleged errors,
omissions, misstatements, breach of duty, negligence, and civil rights violations. Generally, the
wrongful acts must be committed within the performance of the carrying out the district’s
business. Thus, a school board member who makes a misleading statement outside the scope of
the district’s business would generally not be covered under the School Board legal Liability
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Although the definition of wrongful acts may be broad in the definition section of the
policy, the insurance company may try to limit its meaning in the “exclusions” section of the
policy. The risk manager must carefully review the exclusions, and if there are exclusions which
would appear to directly contradict the definition of wrongful acts”, the district and the board
members must attempt to determine the extent of the coverage. The risk manager and the
district’s insurance agent should try to obtain clarification from the insurance company
concerning the scope of the coverage when the definitions and exclusions sections appear to be
Many School Board Legal Liability policies attempt to exclude claims which result in
profit or advantage to an individual insured, or which are brought about or contributed to by a
dishonest or unlawful act by an insured. Thus, if a board member is accused of dishonesty or
obtaining profit and advantage and such a claim is proven there would be no coverage for that
The problem which arises from this language is what happens when a suit is filed which
alleges that a school board member has committed an unlawful act but it has not yet been
proven? Under the exclusions, the insurance company may attempt to deny a defense to the
school board members which would make the board member individually liable for his or her
own defense. A major factor in determining if the insurance company’s position would be
affirmed in court is the context within which the alleged wrongful acts occurred. Thus, if the
alleged improper action can arguable fall within the definition of “wrongful act”, the school
district should take the position that the exclusion does not apply because its application is not
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clear and free from doubt. This argument may force the insurance company to at lease pay the
cost of defense for the school board member.
Generally, the School Board Legal Liability policies also exclude:
• bodily injury
• Desegregation and civil rights based claims
• false arrest or false imprisonment claims
• pollution claims
• employment and employee benefit based claims
• breach of contract claims
There are numerous exclusions in the School Board Legal Liability policies and it appears that
the insurance companies are attempting to limit coverage to breach of fiduciary duty claims. The
problem with this attempt is that in many cases an ambiguity in the policy has been created by
the numerous exclusions. These ambiguities may operate to the benefit of the school district as
ambiguities are construed strictly against the insurance company.
When obtaining a School Board Legal Liability policy, the risk manager should carefully
examine all the exclusions in light of the complete policy. Only by a detailed examination can
the school district and the board members determine the extent of the coverage which they have
purchased. If an examination of the E&O policy does not clearly cover certain claims, the
district must determine if other insurance policies will cover the claim. General liability policies
for personal injury, policies which cover employment based claims for discrimination and other
civil rights based employment claims, and worker’s compensation insurance should be review to
determine if they, in conjunction with the E&O policy, provide a comprehensive scheme of
insurance coverage to school board members. The risk manager should also discuss with the
district’s agent additional endorsements which may broaden coverage and which are available as
addenda to the E&O policies. Finally, the district may attempt to negotiate away the most
onerous exclusions so as to provide the broadest coverage possible to its school board members.
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Conditions of the Insurance Policy:
In addition to examining the insurance policy to determine what errors and omissions are
covered, the risk manager must be familiar with the conditions and limits of the insurance policy.
If the conditions of the policy are not met, the insurance company may be able to successfully
deny a claim based upon the insured’s lack of meeting the conditions precedent which invoke
coverage. The most important of these conditions is the notice provision.
Insurance policies uniformly contain a requirement that prompt notice of claims must be
given to the insurance company. Thus, school board members must immediately notify the
district if an event which could arguably be classified a “claim” occurs. The risk manager for
the district must also have a clear understanding of what constitutes a “claim”. If in doubt, the
insurance company should be notified and records of notification kept. The notifications should
be in writing with the risk manager preparing the notice while looking at the insurance policy to
insure that the policy requirements are being met.
In its notification, the board members seeking coverage should specifically state that he
or she is tendering the claim to the insurance company pursuant to the School Board Legal
Liability policy. Additionally, there may be excess insurance available and the board member
should also notify the excess carrier.3 When tendering and notifying the insurance company of
the claim, the board member should ask for written confirmation from the insurance company
that coverage is being provided pursuant to the insurance policy. Such a statement may be of
assistance in the future if the insurance company attempts to deny coverage and the board
An excess insurance policy is a policy which provides additional insurance over and
above the limits of the initial or primary insurance policy. As a safety measure the excess carrier
should be notified of the claim at the same time that the primary carrier is notified in order to
avoid a late notice defense by the excess carrier.
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member seeks to assert a claim of bad faith against the insurance company.
DENIAL OF CLAIM
In the event that the district’s E*O carrier denies a claim, it must be immediately
challenged by the district and the school board. An immediate challenge is necessary to avoid an
argument by the company that the insured acquiesced to the denial.
In some cases, insurance companies may agree to “defend under a reservation of rights”.
This means that the insurance company is seeking to meet its duty to defend while denying that
any judgment or award is covered by the policy. If there is a reservation of rights issued to the
board member or school district the board member and/or school district should immediately
seek to convince the insurance company that there is coverage. At the very least, the district and
board member should demand that it be allowed to retain its own counsel which would be paid
by the insurance company so as to make sure that the interests of the district and board member
are adequately protected.
In both of these instances, the district and board member should also retain their own
attorney to represent them in the coverage matter. The presence of coverage counsel for the
district and board member will keep the insurance company on its toes and independent coverage
counsel will be able to exert pressure on the insurance company to honor its obligations under
the policy. In those instances in which coverage is denied, the district and the board member
may elect to file suit to force the insurance company to meet its obligations.
Errors and omissions insurance is needed by school districts in order to provide security
to its elected board that they will not be personally liable if sued for performing a community
service. The school district and risk manager, in conjunction with their insurance agent, should
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examine all the E&O policies available and pick the one that provides the most extensive
coverage for the best price. In reviewing the policies, ambiguities in the policy should be
determined, questions asked, and assurances obtained from the insurance company that defense
and coverage will be afforded for the majority of claims which can be asserted against individual
By determining up front exactly the types of claims that will be covered, the school
district will know if it needs to supplement the E&O policy, with other types of insurance, and if
it can negotiate the addition of certain endorsements which broaden coverage. This process will
allow school districts to provide the personal security it needs to members of its community who
seek to meet the needs of their community through school board service.
Georgene M. Wilson, Esq.
SWEENEY AND RIMAN, LTD.
230 W. Monroe Street, Suite 2900
Chicago, Illinois 60606