Avoiding Errors in Your Agency’s E&O

Is the Savings Worth Sacrificing Your Business?

There have been significant changes in the insurance marketplace recently, as prices are down and carrier competition is fierce. Independent insurance agents may be shopping policies to seek the best rates for their clients — as well as for themselves. And one thing agents should ask themselves is what they are giving up in the quest for the lowest rate? Above all, agents should not treat their own errors and omissions insurance coverage as a commodity.

First of all, errors occur. The story of the year has been the overall decrease in premium in the insurance industry. Many new carriers have entered the market, and increased competition has led to a sharp fall in premium levels. Compounded by a weakened economy, policyholders are shopping policies at an increased level — creating more work for insurance professionals without an adequate (or even existent) increase in revenue. As such, insurance professionals are being asked to do more work for less reward. No one has to tell any agency owner how strapped his or her agency is. Yet agency owners also should consider how the increase in workload may be increasing their firm’s probability of errors.

Furthermore, agents should beware of bargains that seem too good to be true. Insurance professionals are consumers themselves, and as a result, agents tend to shop their own policies more often than their own clients. With increased competition, they are finding more choices than in years past. However, for smaller property/casualty agents, many of those choices are not equitable. Do the terms defense outside, insolvency exclusion, master policy, and retro date leave an agent scratching his or her head? Do the terms matter?

The trends are pointing, understandably, to a push from retailers to get the most economical policy. Times are tough, revenues are difficult to find, and cost-cutting is the priority for many agents. However, many agents are cutting costs at the expense of coverage. Carriers can use many tools to decrease their exposure on a policy, and thus decrease the price-point.

A common, and commonly overlooked, tool is to include an insolvency exclusion on the policy. This prevents coverage for the agent against claims as a result of a carrier’s inability to pay claims (thus, insolvency). In the current economic environment, where titans of the industry have stumbled, that overlooked coverage feature can become more important than it is given credit. Strong and broad coverage forms offer a softened exclusion where coverage is afforded to a retailer, provided that the A.M. Best rating of the company is at least an “A-” or “B+” at time of placement.

Additionally, defense costs can be a significant portion of the total loss in an E&O claim. Although most claims are settled, in some instances, the plaintiff is not interested in anything short of a jury trial. At the end of the day, the agent needs to be left with enough policy limits to cover defense costs and the indemnity paid to the plaintiff. Carrying higher limits or a policy where the defense costs are totaled “outside” of the policy limits ensures that the agency has adequate coverage for such unexpectedly tough claim situations.

There has been an increase in “master” policies’ popularity with large groups because using economies of scale, they can sometimes obtain a significant decrease in individual member’s policy costs. Yet before entering into a group policy, it is important to clarify a few items.

Agents should ask themselves: Is there an aggregate limit for the total group? Are they able to maintain their own retroactive date? Does the extended reporting period only apply if they are deceased or leaving the industry? Do they get their own policy declaration page to allow them to maintain continuity of coverage should they wish to move coverage to another carrier? Depending upon the answers to those questions and the needs of the agency, a group policy may not be a good fit — even if the price is attractive.

Any agent, large or small, needs to be certain that his or her E&O coverage is sufficient. In most cases, the difference between a great E&O policy and a stripped-down policy is the price of a large café latte each day. How well will that coffee treat the agent when there is a claim? E&O should not be viewed as a commodity; it’s the protection agents will look to when they need it most.

Topics Agencies Professional Liability