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.

I’ve found 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 well short of what they would deliver to their own customers.

Below are several important tools that can be used to make sure your insurance agency’s E&O policy is one you can be proud of.

Let’s first spend some time describing the status of the marketplace for insurance agents and brokers’ E&O. The marketplace is either extremely soft or dreadfully hard, depending on a few criteria. If you are eligible for an association’s program this may be the best option for coverage as the coverages afforded by these programs can be the broadest at the most competitive premiums available. If this is not the case for you, then depending on the type of agency you are and the states where you operate, you may find that you are facing a limited insurance agents’ E&O market.

Although underwriting criteria differs for each association’s insurance agents’ E&O program, the following are examples of items that will force you to look elsewhere: claims frequency or severity, high percentage of concentration in one line of coverage such as worker’s compensation or medical malpractice and size, judged by premium volume or revenues.

The lack of information provided by insurance agents for their E&O submission is surprising. Insurance agents are in the business, so logic would dictate that they, more than other insurance buyers, would know the value of a comprehensive submission. In many cases, submissions are missing most of the information critical to an underwriter. Problems include:

Applications ask insurance agents to break down their premium volume into various categories (commercial auto, general liability, etc.). The sum should equal 100 percent. You would be surprised how many applications I see where the sum is actually more or less than 100 percent!

Insurance agents’ E&O underwriters are not sitting around twiddling their thumbs looking for submissions. The problem with not providing complete information or answering the questions is that the underwriters who write this coverage are so inundated with submissions that rather than request the additional information they will just decline to offer coverage terms.

As a former insurance agents’ E&O underwriter, I assure you that the most complete, professional and informative submissions get the best quotes. Incomplete and poor submissions are given lower priority or declined. The lesson here is easy: spend the appropriate amount of time putting together a submission for your most important client–you!

Policy coverages
Talking about policy coverages may cause your eyes to gloss over and drowsiness to overtake you, but it is one of the most important aspects to your policy. Every insurance agents’ E&O policy is unique. This forces all parties to spend the time to understand what is actually covered by the policy, and how the policy might respond to various situations. Here are some 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 legitimate claims. If it was a surplus lines insurer and funds from the guarantee fund are not available and you get sued for placing that client with an unstable insurer, will your E&O respond?

Let’s modify the scenario. Assume the insurer was admitted and the state guaranty fund will eventually pay some or all of the loss, but it is taking forever to get the claim paid. Your client brings you into a suit because his 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 that an insurer’s inability to pay a valid claim is not a failure of the insurance agent to do his job, assuming the insurance 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 to you. We have seen E&O claims where an insurance agent is pulled into a lawsuit where 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 exclusion. This is dangerous wording, as it will allow an E&O insurer to deny a claim that should be covered.

For example, many insurance agents have some ability to quote and, sometimes, bind coverage on behalf of an insurer. This activity is frequently done over the Internet using an insurance company Web site. The interesting aspect of such systems is their purpose to provide quotes and bind coverage, and not all of them enforce an agency’s authority levels. If you are using an insurance company system that will actually allow you to quote and bind an account that is outside your authority and you have a breach of underwriting authority exclusion, watch out!

With the multitude of guidelines you must operate within, 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.

The claims I have seen relating to the breach of underwriting authority concept frequently involve personal lines such as auto or homeowners where a less experienced employee is rushed to produce a quote. They make a simple mistake that puts the insurance company in a position to cover a claim that violates their underwriting guidelines.

The insurance company pays the claim to avoid a bad faith suit from the insured, but the story does not end here. The insurance company then looks to the insurance agent to pay the loss. If not for the insurance agent’s mistake, the company would not have paid a loss they were not prepared to pay.

One last coverage issue worthy of discussion relates to the services you provide to your clients. Does your policy cover you for all your activities? Here are some roles you might fill that may not be covered by your policy:

Your policy may not specifically name these services as covered services. If your policy is silent, that is not always the most desirable scenario. Ask your insurer to list such services as covered services.

One last comment on this issue: Make sure your E&O policy covers the various products that you sell. Some products you sell may not be considered insurance products by your E&O insurer. Heare are some examples:

If these or other nontraditional products or services are provided to your clients, 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 line of coverage. A professional insurance agency can have expertise on many coverages, but fall just a little short on one of the most important policies it will buy–its E&O policy. Spend the time to assemble a professional submission, start early in the marketing process and take time to carefully review the options available to you. The results will be a policy that is customized to protect your most important client–you!

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

Topics Carriers Agencies Claims Underwriting Professional Liability