Liability insurance coverage is purchased to transfer liability risks to an insurance company. Professional liability insurance (E&O) typically covers errors and omissions committed in the course of providing professional services.
A recent decision by the district court for the Northern District of Texas, Wichita Falls Division, revealed that professional liability insurance for a home care franchising business can exclude coverage when the error or omission giving rise to the liability claim results in bodily injury or death.
The decision underscores the need for home care businesses to understand what is covered under their professional liability policies and confirm they are adequately insured for all potential losses. The Texas professional liability lawyers at Fee, Smith & Sharp LLP explain the recent decision and what it means for home health franchisors’ professional liability exposure.
Home Health Franchisors Professional Liability Insurance in Texas
Professional liability insurance is underwritten to cover providers of professional services for errors or omissions made during the provision of those services. Coverage is granted by the insuring agreement and limited by the coverage exclusions.
When an insured makes a claim for coverage under an insurance policy, the burden is generally on the insured to prove that the claim for coverage is consistent with the terms and conditions of the policy.
HomeWell Franchising Inc v. Evanston Insurance Company
HomeWell Care Services is a national home care agency that offers franchise opportunities in Texas. Franchisees provide non-skilled, older adult, in-home care services and receive training and ongoing support from HomeWell.
In the underlying lawsuit against HomeWell, an elderly client under the care of a HomeWell franchisee died as a result of alleged neglect after she did not receive the level of care promised by HomeWell’s promotional materials.
HomeWell turned to its professional liability insurance carrier, Evanston Insurance Company, for a defense against the lawsuit. Evanston refused to defend HomeWell based on two exclusions in the policy, leading to HomeWell v. Evanston and a specific decision on an insurance company’s duty to defend.
What the Professional Liability Insurance Policy Covered
The court determined that the insuring agreement provided coverage for two types of harm inflicted by HomeWell or anyone whose conduct the franchisor was legally responsible for.
- A Wrongful Act (negligence, error, or omission) committed in rendering professional services
- A Personal Injury (defined as humiliation or emotional distress)
The court concluded that the allegations against HomeWell fell within the parameters of the insuring agreement. However, any applicable policy exclusions will limit the scope of insurance coverage.
What the Professional Liability Insurance Policy Excluded
The court next considered two relevant policy exclusions that Evanston argued excused the insurer from defending HomeWell or covering the claim.
- The Bodily Injury exclusion denies coverage for claims based on or arising out of actual or alleged Bodily Injury (defined as injury, sickness, or death).
- The Vulnerable Adult Abuse exclusion denies coverage for claims based upon, arising out of, or in any way involving actual Vulnerable Adult Abuse, which is an act, error, or omission that results in Bodily or Personal Injury.
The duty of an insurer to defend an insured does not arise when ALL of the alleged liability falls within the scope of a policy exclusion. Though HomeWell argued that some of the claims against it did not arise out of bodily injury, the court interpreted “arising out of” to require only an incidental or but-for causal relationship.
But for the death of the franchisee’s client, the claim against HomeWell would not have been made. Therefore, Evanston had no duty to defend HomeWell because all of the alleged liability arose out of an actual bodily injury for which the policy excluded coverage.
The significance of the court’s decision for home care franchisors is that professional liability insurance may not provide the coverage franchisors need to avoid potentially severe liability exposure.
Common Exclusions in Professional Liability Insurance Policies that Could Result in Liability Exposure for Franchisors
Not all professional liability insurance policies are created equally. Most E&O policies are tailored to the specific type of business and the professional services offered. Clauses need to be reviewed to understand what is or is not covered.
Below are several coverage issues frequently addressed in franchisor E&O policies. Insurance companies are never looking to increase their financial exposure, so franchisors need to understand what their E&O policy actually covers.
Bodily Injury or Property Damage Exclusions
E&O policies do not typically cover physical harm to persons or property. General liability insurance usually insures those types of exposures. Some E&O policies may provide coverage under certain circumstances. It’s essential to assess whether any insurance offered is adequate to cover the loss exposure.
For home care franchisors, where errors or omissions in providing professional services could result in physical harm to persons, having appropriate liability insurance is a must and may require a combination of liability insurance policies.
Franchisee Exclusion
An E&O policy with a franchisee exclusion will not cover claims made by a franchisee against a franchisor. Franchisee claims against franchisors can stem from issues with the franchise agreement or other alleged conduct by the franchisor. Not having insurance for these types of claims could leave a sizeable gap in a franchisor’s liability coverage.
Third-Party Claim Exclusion
This exclusion denies coverage for claims made against a franchisor by a party other than the franchisee. Third-party claims against a franchisor are often the result of a franchisee’s actions or inaction that cause harm to a client or customer.
In Texas, franchisors are generally not liable for franchisees’ actions when they do not have direct control over franchisee conduct. In a decision earlier this year, the Texas Supreme Court reiterated that franchisors are not liable to third parties for franchisees’ actions if franchisors do not have the right to control the specific conduct that results in the claimed injury.
There is still third-party claim exposure that liability insurance should cover. Franchisors may be liable to third parties if they have too much control over the day-to-day operations of franchisees, or they may be liable to third parties for their own conduct.
Don’t Wait for a Claim to Find Out Your Professional Liability Insurance Won’t Cover You
At Fee, Smith & Sharp LLP, our attorneys routinely defend a broad range of Texas professionals against professional liability lawsuits alleging malpractice, negligence, breach of contract, and other claims stemming from professional services. We counsel clients on how to be adequately prepared to meet business risks and minimize liability exposures. Fee, Smith & Sharp LLP serves clients in Dallas, Austin, and Houston.
