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

Independent insurance agents may be shopping their errors and omissions insurance coverage to seek the best rates. But what they are giving up in the quest for the lowest rate? Agents should not treat their own E&O policy as a commodity.

First of all, errors occur. The story of the year has been the overall decrease in premium. New carriers have entered the market, and this 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 increase in revenue. Insurance professionals are being asked to do more work for less reward. 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. With the increased competition, agents are finding more choices than they had a few years ago. However, for smaller agencies, 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?

Times are tough, revenues are difficult to find, and cost-cutting is a priority for many agents. However, some 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). 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. Higher limits or a policy where the defense costs are totaled “outside” of the limits ensures adequate coverage for tough claim situations.

There has been an increase in master policies’ popularity with large groups, which can sometimes save individual members money. But a group policy may not be a good fit. Agents should ask: 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 move coverage to another carrier?

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