Agencies Shopping for Lowest E&O Rates Could Be Adding to Their Risk

No Agency Is Worth Sacrificing for the Cost of a Cafe Latte Each Day

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. But 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 the increased competition has led to a sharp fall in premium levels. Compounded by a weakened economy, policyholders are shopping their 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 even their own clients. With the increased competition, they are finding more choices than they had a few years ago. However, for smaller property/casualty agents, many of the choices are not equitable. Do the terms defense outside, insolvency exclusion, master policy, and retro date leave an agent puzzled? Do the terms matter?

The trends are pointing, understandably, to a push from retailers to get the most economical policy available. Times are tough, revenues are difficult to find, and cost-cutting is the main 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 any 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. 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 both 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 adequate coverage for such unexpectedly tough claim situations.

“Master” policies have been around for some time, but there has been an increase in master policies’ popularity with large groups. Using economies of scale, large groups can sometimes obtain a significant decrease in their individual member’s policy costs. Yet before entering into a group policy, it is important to obtain clarification on 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 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.

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