The errors and omissions (E&O) clause recently become a source of dispute in the reinsurance industry. If the treaty or certificate is broker generated, it may have an expansive clause that excuses a whole spectrum of errors and omissions. Second, if a reinsurer generates the wording, the drafter may use “off the rack” language without giving thought to what the language actually does.
Remember the rather humble origins of this clause. Ceding a risk began as a laborious, paper intensive process, long before IBM developed a vacuum tube. It also usually occurred in a long-term quota share treaty environment. The clause was in essence a contractual vehicle to achieve the equitable remedy of rectification with respect to the flow of information. It was never intended to correct errors of judgment, or to allow cession with the benefit of hindsight.So what does that mean today? Copying and pasting from that “clauses” file on your hard drive can be a bad thing.
If you want to excuse a late claims notice, do so deliberately, not accidentally because you didn't pay attention to the clause. If you have a facultative obligatory treaty, how and when do you want your cedant to be able to say “oops”? In an excess of loss treaty that is not dependant on a bordereau, do you want to give the cedant an argument that a pre-contractual failure to disclose can be an “omission”? If not, exactly what does the clause do for you in an excess of loss context? These are topics that should be considered and negotiated rather than determined because “we always use this language”.
The bottom line is relatively simple. A reinsurer intends to reinsure a given type of risk under given circumstances for a given price, and to receive given information at given times. Carefully drafted, the clause can help fulfil this intent. Carelessly drafted, the clause can open wider liability than was ever intended. In today's increasingly contentious tort environment, wording really does matter.