Professional Liability/E&O Here Today, Gone Tomorrow

Professional liability and errors & omissions (E&O) are two
coverages that just aren’t yet seeing the impending softening of the hard market—and are unlikely to anytime soon.

These days, the professional liability market resembles somewhat of a revolving door. Carriers have been exiting the market as fast as they came in. The increasing number of claims combined with excessive litigation are key contributors to the difficult marketplace. Miscellaneous E&O is a walk in the park when compared to writing professional liability for lawyers, doctors, real estate agents, and even agents and brokers.

“Today’s environment is a product of the soft market,” Jason White, a broker with Swett & Crawford, said. “Some of the carriers that have left the market, have been, in hindsight, irresponsible in their pricing. You typically are leaving the market because you have bad results. Markets have left because, due to adverse claims experience, new markets are coming in as a result of perceived opportunities created by higher premium.”

“Challenges we face right now are mostly in the area of stability,” Patrick McLaughlin, owner of McLaughlin Brunson Insurance Agency, said. “From a marketing standpoint, there’s the insurance industry itself—who is a player today and who’s not tomorrow. It’s sort of a state of confusion. There’s an awful lot of long term underwriting companies who have either abandoned certain markets or abandoned certain territories within those markets, or placed significant restrictions on the types or amount of coverages that they’ll write. One of the biggest challenges facing agents is to know which one might be appropriate for any given moment for any particular risk.”

“Certainly the market is tough right now,” Holly Fujie, partner with the law offices of Buchalter, Nemer, Fields & Younger, said. “It’s a difficult situation in just about every single industry. Everybody feels that rates are going through the ceiling and the emphasis from the professional point of view is obviously trying to reduce risk. I think there’s a feeling that the insurance industry could be doing more to assist professionals with risk reduction programs. There seems to be not very much emphasis on risk reduction and more on raising premiums.”

Insuring yourself: The agent’s plight
Agents and brokers have quickly risen through the ranks to one of the most difficult classes of business to insure, right up there with doctors and lawyers, architects and engineers. Claims are being filed as a result of rising premiums and lost coverage—problems agents have little or no control over. The hard market exacerbates the situation as capacity tightens and agents are faced with their own increasing premiums.

“Insurance agents E&O is a very tough marketplace,” White said. “We’ve seen a lot of markets pull out of that. This is due to the loss history that has occurred in the insurance agents E&O market.”

“Anytime insurance becomes difficult to access and very expensive, that’s almost an automatic signal for people to start being more critical, if you will, of how they’re being handled by their agent or broker,” Letha Heaton, senior vice president of marketing & sales at Shand Morahan & Company Inc., said.

“There’s a lot of dissatisfaction by the consumer in the hard market that just increases the likelihood of claims,” Heaton continued. “The other side of this is that there are a number of insurance companies who have become insolvent or whose rating has declined. And that’s probably even the more onerous issue. If you’re an agent or broker and you put somebody in with Kemper, did you know Kemper was going to fail? It’s hard to believe that a 100-year-old company is going to go belly-up. But if I’m a consumer, and I’m left holding the bag so to speak, and I’ve paid for insurance and there’s no coverage, who am I going to sue? I’m going to start with my agent. So they get the brunt of the consumer backlash during the hard market cycles.”

“The number and complexity of insurance agents’ E&O claims have increased in recent years,” Dave Obenauer, senior vice president of Schinnerer & Company, said. “Some of this increase is due to the present insurance environment. A hard market makes it more difficult to find coverage for clients and the cost for coverage that is available has been increasing significantly over expiring levels. In addition, the downgrade and withdrawal of some insurance companies results in fewer options for the agent and broker. The aggregate effect of these events translates into more reliance on the insurance agent to find comparable coverage for insureds, and may result in more frequent disputes arising out of errors and omissions.”

“It’s important to note that there is no correlation between the size of an error or omission and the size of potential damages in the resulting E&O claim. A simple clerical error that results in an incorrect inception date or limit can give rise to a multi-million dollar claim. The issue of coverage placement—whether it is adequate, timely or even available—is the single largest driver of claims against insurance agents and brokers,” Obenauer added.

The toughest classes
With the medical malpractice crisis reaching crisis proportions in many states, including Nevada, Pennsylvania, and Florida, professional liability has become the thorn in many doctors’ sides, as the heavily-litigated culture has made it nearly impossible for physicians to obtain insurance coverage. Med-mal continues to see substantial rate increases, according to White.

“My assessment is that in the healthcare arena, this is going to be a tough line for a pretty long time,” Heaton said. “Medical coverage is becoming harder, more expensive, less available, and physicians are disenfranchised by the system. Attorneys are looking at this prospect of being capped in terms of jury verdicts. It’s a very tumultuous environment right now, and my guess is until we figure out some more rational ways to handle the healthcare arena, particularly when it comes to medical malpractice, that market isn’t going to get better soon.”

“Med-mal has such a high relative percentage of going to trial, in part because doctors don’t like to admit liability or to settle,” Fujie said.

Lawyers have traditionally been a high-risk class of business and ironically continually face the possibility of having a suit brought against them.

“The legal environment right now, particularly in the healthcare arena, is very turbulent,” Heaton said. “There’s a lot going on. There’s physicians who are coming out of college and can’t command the kind of compensation that they could historically, you’ve got people attempting to cap jury verdicts on medical malpractice claims, you’ve got doctors who can’t afford their professional liability in order to practice medicine—people hold lawyers accountable for that. It’s because lawyers take these cases on a contingency basis. So there are a lot of claims against attorneys. Once you get a claim, it’s more difficult to secure coverage if you’re an attorney.

“Attorneys themselves are going through a pretty difficult time themselves because again, I would say some public backlash is going on,” she added. “When you get a claim on a lawyer, that’s generally a high severity class of business. A lot of people are getting out of it right now. Again, like med-mal, they’re saying ‘This isn’t worth it. We’re not going to do this anymore.'”

Scott J. Kenny, assistant vice president of Tangram Program Managers & Insurance Services, said there are a good amount of claims that they see on a recurring basis, including missed court dates, scheduling difficulties, and collections. “Collections seem to be a big risk for lawyers. When they can’t collect their fees from a client, they go in to sue and then the client will automatically sue for malpractice,” he said.

Real estate is another difficult profession, according to Kenny. “We see that the value of houses are ever increasing, so that puts you on guard as far as claims rising.” Kenny said many claims stem from conflicts that develop when the agent represents both the buyer and the seller. “We see a lot of companies coming in and out of the market as far as writing real estate agents,” he said.

“In the architects and engineers profession, one of the largest underwriting companies has significantly decided to restrict it’s line of writing by reducing the amount of clients that they have,” McLaughlin said. “A couple of the markets have been downgraded financially by some of the rating bureaus.”

Other professions
Doctors, lawyers and agents aren’t the only professions faced with shrinking capacity and high premiums. Financial industries—stock brokers and financial advisors are proving to be a treacherous profession, evident by the recent investigations of insider trading and failed transactions.

The Sarbanes-Oxley Act complicates matters, requiring those in the financial industry to operate ethically and honestly, which is no small feat for some.

“If you’re advising someone to buy stock from a certain company, and three days later there’s a scandal, you have to prove that you didn’t know about it, right?” Heaton said. “Sometimes it’s pretty hard to prove the absence of knowledge.”

Information technology (IT) has also stepped into the limelight as the Internet continues to develop at a rapid pace. “[IT] is changing in such a rapid fashion. That’s part of the problem,” Heaton said. “If you’re an underwriter, how do you underwrite stuff that nobody’s ever done before? That’s what E&S does. But my point is, how do you anticipate what will be the toxic torts, if you will, of IT 20 years from now? We just don’t know. It’s such a rapidly changing and growing environment. It’s a very hard area to underwrite.”

Intellectual property is another area, according to Heaton. “That in and of itself is affected by IT. Look at the Internet cases with a patent infringement and the music industry. All of those dynamics are being played out in the public sector and again, we just don’t know how they’re going to end up. How do you protect lyrics, how do you protect a patent in this environment, where the exchange of information is so fluid and so easy and fairly hard to track? We see a lot of submissions in IT and in intellectual property, especially as it relates to the delivery mechanism through the Internet,” she added.

Reducing exposures
In the current professional liability environment, agents and brokers need to work harder to reduce exposures for themselves and for their clients. There are several things agents can do to help reduce exposures:

Understanding your clients
In professional liability’s difficult environment, it’s really an understanding of the professions the agent or broker serves that equals success. Just as carriers enter and exit the market, agents will find that the ability to successfully place a professional liability account lies on their knowledge of the profession they are placing.

“If an agent thinks that he can be comfortable simply understanding what professional liability is and simply being a conduit for applications from the client to the company, he’s probably not very valuable in the process,” McLaughlin said. “On the other hand, if the agent or broker has an understanding of the industry that he’s trying to serve, whether it’s legal or medical or real estate… if he understands those challenges that those clients face, then he’ll know the best approach to the insurance, best view of deductibles, which premiums might be appropriate, what kinds of retention makes sense, which insurance companies they should approach, and they’ll go a long way toward doing a better job for their clients, which in effect reduces their own exposure from an E&O standpoint.

“For example, if it is a law firm, what kinds of law do they practice, and what are the challenges that a law firm in that line of business faces,” McLaughlin continued. “Not every law firm faces the same challenges because each does a different kind of work and if you don’t understand the difference between Family Law and Corporate Practice and Real Estate, then you won’t know what the risks are and you won’t know how to best protect the firm. I think the agents have to get the education on their own.”

McLaughlin suggested that the best way for agents to gain knowledge about the professions they are trying to place coverage for is to spend time with their clients. He also recommended agents talk with MGAs, underwriters and program managers to gain further understanding of the profession.

Communication
As in any business relationship, communication is key. Agents and brokers are responsible for communication on both ends—with the carriers and with their clients. Bad communication on either end can result in a failed transaction, or even worse, lost business.

On the carrier side, agents and brokers should work with financially strong companies, Obenauer said. Documen-tation is vital when dealing with both carriers and clients.

Insurance agents and brokers should follow their own advice to their clients—that is, be sure customer service standards are embraced by all of their employees,” Obenauer added. “They should also implement a strong quality control process to eliminate clerical errors. It is important to maintain strong client relationships and be sure their E&O insurer is aware of everything that is being done to minimize E&O exposures.”

Complete submissions
If there’s one thing that carriers look for when underwriting any risk, it’s completed submissions. All too often they receive incomplete or incomprehensive submissions, which leads to a delayed response from the underwriter.

“[Agents] really need to look at the information that they’re transmitting and make sure that it makes sense,” McLaughlin said. “A lot of the clients that fill out applications for professional liability don’t necessarily understand the questions that are being asked, and if the agents don’t review the information, what they might be transmitting between the client and the insurance application is some almost clear information. And almost clear information can lead to either misquotes, inappropriate premiums, or it can lead to exclusions that they need to be looking out for. They really need to understand the information that they’re transmitting.”

Keep your employees accountable
Reducing exposures for both the agency and your clients is the responsibility of all employees—so take care when hiring new employees.

“Hire quality people,” Kenny said. “Do your due diligence when you’re hiring someone to make sure that you know what their past is like and where they’re coming from.”

“Agents and brokers should endeavor to make sure they provide superior customer service to their clients,” Obenauer added. “That includes hiring and training qualified staff, providing the appropriate quality control procedures and systems, and responding to complaints provocatively. An agent’s customer service procedures should also be thought of as one element in their E&O Risk Management Plan.”

Relief ahead
Despite the difficulties in the professional liability/ E&O marketplace, some carriers are optimistic that the market will turn.

“You’ll always have those types of accounts that are going to be hard to place by virtue of their risk,” White said. “[But] it’s going to cycle. Ultimately, we are going to see people entering back into this marketplace. We’re already beginning to see a softening of the market in the P/C marketplace. Carriers are going to seek additional sources of revenue, which may bring them back into the marketplace.”

Topics Carriers Agencies Claims Underwriting Market Professional Liability