Insurance Agents E&O: Are YOU Properly Covered’

Have you heard the story of the shoemaker’s children? Although their father was a shoemaker, they always had the most worn shoes. The reason is their father spent so much time and effort taking care of his customers; he did not have time to make shoes for his own children. The same concept applies to insurance agents’ errors and omissions coverage. Insurance agencies focus on their customers’ needs with such obsession that when it comes time to place one of the most important coverages for their own agency, they come up short of what they would deliver to their customers. There are several important tools to make you proud of your insurance agency’s E&O policy.

The marketplace for insurance agents E&O is either extremely “soft” or dreadfully “hard.” If you are eligible, an association’s program may be the best option. Coverages afforded by these programs can be the broadest at the most competitive premiums available. If this is not the case, then depending on the type of agency and the states in which you operate, you may face a limited insurance agents E&O market. Although underwriting criteria differs for each association’s E&O program, the following items will force you to look elsewhere: claims frequency or severity; high percentage of concentration in one line of coverage such as workers’ compensation or medical malpractice; size, judged by premium volume or revenues.

At ARC West Coast Excess and Surplus, we place a significant amount of insurance agents E&O and are constantly surprised at the lack of information provided by insurance agents for their E&O submission. Logic would dictate that insurance agents, more than other insurance buyers, would know the value of a comprehensive submission. In many cases, submissions are missing critical information such as:
incomplete claims information; unanswered questions; or where additional detail is requested,
none is given.

Applications ask agents to break down their premium volume into various categories (commercial auto, general liability). The sum should equal 100 percent. It is surprising how many applications I see in which the sum is more or less than 100 percent.

The problem with not providing complete information or answering questions is that underwriters are inundated with submissions; rather than request the additional information they will just decline coverage. The most complete, professional and informative submissions get the best quotes. Incomplete and poor submissions are given lower priority or declined. The lesson is easy, spend an appropriate time putting together a submission for your most important client–you.

Policy coverages
Talking about policy coverages important to your policy. Every insurance agents E&O policy is unique. All parties must take time to understand what is covered and how the policy might apply to various situations. Here are important items to consider:

Will your policy cover you if you place a client with an insurer that is rated below “B+” by A.M. Best? Assume that insurer goes insolvent and is unable to pay claims. If it was a surplus lines insurer and if funds are unavailable from the guarantee fund and you are sued for placing that client with an unstable insurer, will your E&O respond?

Let’s modify the scenario. The insurer was admitted and the State Guaranty fund and will eventually pay some or all of the loss, but is taking forever to get the claim paid. Your client brings you into a lawsuit because their claim is not being paid in a timely manner. Will your E&O policy respond?

The circumstances described above all relate to the “insolvency” exclusion in most insurance agents E&O policies. One can argue an insurer’s inability to pay a claim is not a failure of the agent to do his job, assuming the agent advised his client of the insurer’s A.M. Best rating. However, as a buyer of an insurance policy, you should get the broadest coverage available. We have seen E&O claims in which an insurance agent is pulled into a lawsuit in which the central issue is an insurer’s insolvency. These claims are expensive due to high defense costs.

Another unique exclusion is the “breach of underwriting authority.” This dangerous wording allows an E&O insurer to deny a claim that should be covered. For example, many agents have some ability to quote and, sometimes, bind coverage on behalf of an insurer. This activity is often done over the Internet using an insurance company Web site. While such systems’ purpose is to provide quotes and bind coverage not all of them enforce an agency’s authority levels. If you use an insurance company system that allows you to quote and bind an account that is outside your authority and you have a “breach of underwriting authority” exclusion, watch out! Within the multitude of guidelines it is only a matter of time before an employee makes an honest mistake and violates a quoting or binding guideline. Your E&O policy should respond to this issue.

One last coverage issue relates to the services you provide to clients. Does your policy cover you for all activities? The following roles might not be covered by your E&O policy: risk management consultant, financial planner, claims adjuster, third party administrator and managing general agent.

Your policy may not name these services as “covered services.” If your policy is “silent,” it isn’t a desirable scenario. Ask your insurer to list such services as “covered services.”

One last comment: Make sure your E&O policy covers all products you sell. Some products are not considered insurance products: Variable life and annuity (sometimes considered investment products), mutual funds, pre-paid legal services, viatical settlement contracts and human resource consulting.

If you provide clients with these or other “non traditional” products or services, your policy should reflect this activity. Again, a “silent” policy is not an agreement that coverage is provided.

Insurance agents E&O is a specialized coverage. A professional insurance agency can be expert on many coverages, but fall short on one of the most important policies you will buy–your E&O policy. Assemble a professional submission, start early in the marketing process, and take time to carefully review all options–the result will be a customized policy that will protect you.

Mike Kizlinski is a senior broker with ARC West Coast Excess & Surplus Brokerage LLC in Pasadena, Calif. ARC West Coast Excess &
Surplus is a wholesale broker specializing in management liability coverages such as D&O, E&O, and EPL. Kizlinksi can be contacted at (626) 584-5050 or mkizlinski@arcxswest.com.

Topics Carriers Agencies Claims Excess Surplus Professional Liability