WRONGFUL ACT

Wrongful Act – A Deed Leading to Insurance Claims

In plain language: A wrongful act is basically any action that a person or a company does that results in harm or damage to someone else. It's the stuff you get in trouble for, legally speaking. 

Technical definition: From an insurance perspective, a wrongful act is any error, omission, neglect, breach of duty or something illegal that results in a claim under professional liability insurance policies, including Directors and Officers coverage and Employment Practices Liability Insurance. It is the cornerstone of claims-made policy triggers and can have extensive implications for any organization. 

Picture this: your company’s HR manager fired an employee who later claimed the termination was unjust and discriminatory. Now, the ex-employee is suing your company. The term at the heart of this – and many other business lawsuits – is 'wrongful act.' 

TL;DR

A wrongful act is a mistake or intentional deed that causes harm or loss. 

It's pivotal in liability insurance, especially in recognizing eligible claims. 

Misunderstandings around the wrongful act definition can lead to claim denials. 

One quick win for agencies: clarify the specific actions considered 'wrongful acts' under each policy. 

What Is Wrongful Act in Insurance?

A wrongful act, in the context of insurance, encompasses a range of actions that could render an individual or a company liable for legal consequences and financial loss. 

Within an insurance policy, the definition of a wrongful act can be found in conditions or declarations. Although the phrasing can vary, it's generally regarded as an act, error, or omission in performing professional services that results in harm to another party. Any major misstep, from negligence to breaches of fiduciary duty, can fall under this term. 

For instance, in an employment practices liability insurance policy, wrongful acts may include workplace harassment, wrongful termination, and employment discrimination. In Directors and Officers coverage, a wrongful act could involve breach of duty or contract. 

Key Related Terms to Know

Breach of Duty - The failure to fulfill a responsibility or obligation. 

Fiduciary Duty - The responsibility to act in the best interest of another party. 

Negligent Act - A careless mistake or omission that causes harm to another person. 

Professional Services - Any services provided by professionals that require specialized skills or knowledge. 

Professional Liability Insurance - Insurance that covers professionals against liability incurred as a result of errors and omissions in performing professional services. 

Employment Practices Liability - Liability insurance for employers that covers wrongful acts arising from the employment process. 

Directors and Officers Insurance - Liability insurance for company's board of directors and officers. 

Common Questions About Wrongful Act

What does wrongful act doctrine signify? 

The wrongful act doctrine, under American law, means the prevailing party in a legal dispute over insurance coverage may get special damages (like legal expenses), even when the policyholder is found not guilty of a wrongful act. This principle ties directly to risk management and the American rule of coverage litigation. 

Are all wrongful acts covered by insurance? 

Not always. Anything considered an "intentional or illegal act" typically falls under the policy's intentional acts exclusion. In other words, a policy will likely not cover a wrongful act if it is proven the policyholder committed the act knowingly or intentionally. This often varies by state and carrier; always check the specific policy form. 

Which insurance policies are most associated with wrongful acts? 

Two types of insurance are closely tied to wrongful act: Directors and Officers (D&O) insurance and Employment Practices Liability Insurance (EPLI). Both policies serve as lifelines for companies, protecting their interests when a wrongful act leads to claims and legal disputes. 

What is the difference between wrongful act and negligent act? 

A negligent act is unintentional but careless, like a surgeon making a mistake during a medical operation. A wrongful act is broader, including both intentional and unintentional acts. In professional liability insurance, a negligent act is often considered a subset of wrongful acts. 

Wrongful Act vs. Negligent Act

Negligent acts and wrongful acts are not the same and are dealt with differently in insurance policies.  

Real Claim Examples Involving Wrongful Act

Scenario 1: A software company CEO made public statements against a competitor that were found defamatory. The subsequent lawsuit was covered under the company’s D&O policy as a 'wrongful act.' 

Scenario 2: A doctor misdiagnosed a patient's illness, leading to improper treatment and the patient's health worsened. This was considered a negligent act, a form of a wrongful act, and resulted in a malpractice claim. 

Scenario 3: A company fired an employee who later sued, alleging wrongful termination based on age discrimination. This instance constituted a wrongful act under the company's EPLI coverage. 

Limitations and Common Mistakes

Misinterpreting the wrongful act definition in insurance policy fine print leading to "surprises" post-claims. 

Assuming that the intentional acts exclusion applies to all intentional acts. Not all are excluded; it's specific to illegal or intentionally harmful deeds. 

Not understanding the policy conditions and the duty to defend clause related to a wrongful act. 

Not handling the claim notification properly when a wrongful act might have occurred. 

How to Explain Wrongful Act to Clients

Personal Lines client "Think of a wrongful act as something someone does – by mistake or on purpose – that ends up causing harm or loss to someone else. If it's a big mistake that leads to a lawsuit, insurance could step in to help cover some costs." 

Small Business owner "A wrongful act is basically any serious mistake or offense made by your company that harms another party and results in a lawsuit. It could be anything from a breach of contract to an HR mistake. Our job is to ensure your liability insurance can respond if one of these situations arises." 

CFO or Risk Manager "In the professional liability world, a wrongful act refers to errors, omissions, or breaches of duties that lead to legal actions. These are often the triggering events for coverage. Your best defense is to be proactive in risk management and to understand precisely how your policy language defines 'wrongful act.'"