Q: Are my agency's independent contractors covered under my errors and omissions (E&O) insurance policy? Colleagues and insurance agents have given me conflicting answers. Some say that if the independent contractor (IC) is incorporated, the policy does not cover the IC. Others have told me that I would have to pay an extra premium for coverage of ICs. However, large host agencies claim that their policies automatically cover everybody. So let's say my IC falls for a phishing scam and gives out his GDS login, resulting in thieves issuing $30,000 in tickets on a Sunday against phony credit cards. If the airlines sent us debit memos for the credit card chargebacks, would we be covered by E&O?
A: Your E&O policy could cover ICs, and it could protect you against those debit memos. The answers really depend on the exact wording of your policy and the degree to which you are unwilling to take "no" for an answer from the insurer.
The most popular E&O policy states this about coverage of ICs: "Each of the following is an insured under this policy to the extent set forth below. ... Independent contractors who are individuals acting alone, whether or not incorporated, working under contract with the Named Insured to sell the Named Insured's travel services, but only when selling the Named Insured's travel services or conducting the Named Insured's Travel."
So we can see that ICs are covered under some circumstances, even if they have their own corporations. However, the quoted language raises more questions than it answers.
What does "acting alone" mean? If the IC is incorporated, does the policy cover just the individual and not the corporation? What if the IC has a limited liability company (LLC) instead of a corporation?
What does "contract ... to sell the Named Insured's [i.e., the agency's] travel services" mean, exactly? If the client belongs to the IC, does it mean that the client is not selling the Named Insured's travel services?
A client of mine obtained one insurance agent's answer to these questions as follows: An IC would be covered (as would his corporation or LLC) if the IC has no partners or employees and if the IC held himself out to clients as being affiliated with the host. For example, making sales as "John's Travel LLC, an independent affiliate of Host Inc." would be sufficient to cover all sales by John.
Of course, that is one agent's interpretation of the ambiguous policy, and it is not binding on the insurer itself. Considering the huge expansion of the home-based IC phenomenon over the past two decades, it is really odd that E&O policies define these coverages so unclearly.
The second issue -- coverage for debit memos -- is likewise very unclear. The same E&O policy quoted above has no less than 33 exclusions, and while none specifically mentions debit memos, several exclusions have been invoked to deny coverage.
For example, there is no coverage for a loss "for which the insured has assumed liability in a contract or agreement." In the past, one insurer has consistently denied coverage on this basis, even though there may be no contract expressly stating that you must pay debit memos.
Another one of the 33 exclusions is for cases of "misappropriation of data" in a computer system. Since the thief misappropriated your agency's or your clients' data in order to produce the tickets, the insurer will probably invoke this exclusion.
In my experience, insurers often deny coverage when they shouldn't, and travel agencies usually do not have the resources or time to challenge the denials. My advice is not to take "no" for an answer, and if necessary, consult an attorney specializing in bad-faith insurance litigation.