The determination of when an insurer pays defense costs
turns on whether the E&O policy is an indemnity or a liability
policy
The hypothetical
HealthPayPlus (HPP) designs custom record management systems for
large hospital systems. HPP developed a system for Research
Hospitals of America (RHA) that HPP promised would revolutionize
RHA's provision of healthcare services and the processing of
payments for those services. Despite months of testing, the HPP
system crashed just weeks after it went live. RHA filed suit
against HPP alleging breach of contract, negligence, and
misrepresentation.
HPP has a professional services errors and omissions (E&O)
insurance policy that requires its insurer to pay loss. Defense
costs are included within the definition of loss. The critical
issue for HPP will be the timing of when its insurer must pay
defense costs. Must the insurer pay defense costs as the litigation
progresses, or only reimburse defense costs HPP has paid after
