Why You Need to Buy Insurance

Payment companies get sued. It is a normal course of business. They plan for it and they are willing to pay for it. The truth is, however, there is a simple step that they often miss that could help avoid the extensive financial and time costs of litigation. That step? Obtaining errors and omissions insurance—also called E&O insurance or professional liability insurance.

The Basics of E&O Insurance

The general purpose of E&O insurance is to protect a company or its management from liability for allegedly wrongful acts performed in the course of their duties. In general, E&O insurance includes any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an insured person in the discharge of his/her duties.

In plain English, an E&O policy will cover errors in judgment, inadequate performance of obligations, and failure to exercise reasonable business judgment.

When a claim comes in, the policy provides the following:

• Defense costs: You are provided with or get to hire lawyers to defend you in litigation.
• Damages awards: Your policy pays out on settlements or awards, up to the limit of the policy.

E&O protection comes at a relatively low cost, but has the potential to save you if you are named in a lawsuit brought by private party and federal agency such as the FTC.

The FTC Is Out to Draw First Blood

There is no avoiding it. The FTC is on a litigious rampage against payment and processing companies, as well as their directors and officers, for deceptive marketing practices and consumer fraud. And the stakes are high. Through civil court action, often in concert with other governmental agencies, the FTC employs a scorched-earth approach to dealing with transgressors. That is, complete, multifaceted annihilation.

The FTC’s ability to sanction is frighteningly unfettered. The FTC can and will typically seek consumer redress damages in the amount of a company’s total sales spanning across the course of its existence. It may also request permanent injunctions to prohibit management from engaging in certain conduct in the future; sometimes enveloping that which is perfectly innocent.

Occasionally, these injunctions go so far as to completely prevent a company or individual from doing business or dealing with consumers ever again. Moreover, the government’s aggressive tactics include pursuing asset freezes that leave companies without the resources to defend themselves.

In cases where it deems the deceptive practices particularly egregious, other law enforcement agencies will get involved. The FBI and other agencies will investigate and prosecute such cases in their criminal capacity. These criminal cases often occur at the same time as the civil suits.

Similarly, the U.S. Department of Justice (DOJ) may also get involved in instances of criminal contempt. An officer or other member who fails to comply with any of the civil court’s judgment or injunction terms can face charges and conviction. Though seemingly a minor offense, one found guilty of criminal contempt could easily face prison time.

The Goal is to Incapacitate You

Not surprisingly, the cost of defending these cases can be daunting. “Daunting” means spending anywhere from hundreds of thousands to several millions of dollars in attorneys’ fees alone. The number fluctuates due to variables such as the complexity of the issues, strength of the evidence, and whether or not the case goes to trial.

State law or contractual obligations may require companies to indemnify their directors and officers in such an event. But the harsh reality is that asset freezes or other expenditures may render the defendant company financially unable to defend or indemnify its senior management.

The resulting incapacitation is no accident either. It is the exact result the government seeks to create through its aggressive tactics. For example, the FTC typically first seeks a court order such as a temporary restraining order (TRO) or preliminary injunction (PI). One key provision of such an order is to freeze a company’s assets and, sometimes, the personal assets of any named employee.

The FTC may also seek a court order which places the company in involuntary receivership or requires that it stop doing business altogether. Even if this is a temporary deprivation of assets, this first strike effectively paralyzes the defendants of their ability to affect a meaningful defense.

You can avoid or mitigate this nightmarish scenario by purchasing errors and omissions insurance. The risk of debilitating sanctions for malfeasance is high; you will want this protection in place to attract and retain quality officers for your board.

Three Things to Look for in an Effective E&O Policy

You should take the following into account when considering your E&O coverage options:

• Choose a policy that imposes a “duty to defend” on the insurer that covers true costs. Some insurers may actually provide inadequate coverage under their “duty to defend” policy by only paying your out-of-pocket costs. But this reimbursement approach rarely covers all the financial losses your company faces when defending a professional liability lawsuit. Moreover, if the FTC freezes your assets, you will be in the same position as if you had no insurance at all—without the funds needed to acquire a legal defense.
• Identify a policy that provides protection in the event of alleged violations of consumer protection laws. Insurers may avoid providing protection in the event of lawsuits brought by government bodies and agencies by stating these lawsuits as particular exclusions. Others may cover defense costs related to violations of consumer protection laws, but will not cover fines or penalties. You should make sure that the policy you choose offers you broad coverage for these claims.
• Pick a policy that allows you to choose your own counsel.Some insurers provide a “choice of counsel” provision that allow you to make the sole decision in which attorney represents you in litigation. Other insurers require a mutual agreement on counsel, while others outright refuse to provide you with a choice. Make sure this provision allows you as much freedom to choose as possible.

It is important to take note of your coverages in the event of a lawsuit that involves intentionally wrongful or illegal conduct. Most E&O insurance policies may provide for defense costs, but not for indemnification. Speak with your insurance agent to review your coverages and arm yourself with the knowledge you require to make smart insurance decisions.

Achieve the Right Victory

Your next step on the road to E&O victory is to find a good insurance broker who can explain your coverage options. That broker can then set you up with that the right policy to protect you. This is key because many polices have gaps in coverage that may make them unsuitable for your needs.

If you already know of a great insurance broker that has focused experience working with payment processing companies, call them today. And always remember to have prospective policies reviewed and negotiated by competent, experienced legal counsel.