The Desert Climate of Agency E&O

As an agent or broker, there’s no doubt in your mind that E&O coverage is hard to come by. But is E&O for agents in crisis proportions or is it still within reach? That depends on whom you ask. Some are adamant about the crisis; others maintain it is just another product of the hard market. Agents’ E&O generally is available, but in most cases, it comes along with a hefty price tag.

“I think the perception that there is an availability crisis in agents E&O is a myth,” said David Surles, director of professional liability at the Independent Insurance Agents of Texas. “With rare exceptions, E&O is available to every agency, even a start-up agency or an established agency with poor claims history, for a price. It may be necessary to shop harder than ever to find coverage, and an agency may end up in with a surplus lines company, but coverage is available. Price is more the problem than availability. And price is directly related to the poor loss experience.”

Tim Hyland, owner of Louisville, Ky.-based Hyland, Block & Hyland, shared a different opinion. “It’s been a real problem for us over the last 18 months,” he said. Hyland’s agency is a master agency within the Strategic Independent Agents Alliance (SIAA) organization, under which he has 55 satellite agencies participating. According to Hyland, it’s been especially difficult for new agencies to obtain E&O. “The ones that we do [write], are able to get it, but the pricing has probably tripled from what it was when we began the program in 1998. So we’ve really had to stop and be careful before we bring an agency into our network, to see if in fact we can get them the E&O insurance that they need to operate. So it’s been a thorn in our side for the last year and a half.”

“There’s a pretty big void in the marketplace,” said Jim Heisler, president of Beaverton, Ore.-based Indemnity Excess & Surplus Agency. “The only real players left are the carriers that didn’t give it away to start with, either that or they have restrictive coverage so they can’t stay in the game.”

Driven by reinsurance
While there’s no questioning the frequency of claims, combined with the number of recent company insolvencies and the rising cost of litigation, has attributed to the lack of E&O availability, ultimately, the marketplace is suffering because of the hit on the reinsurance market after the Sept. 11 terrorist attacks. “There are fewer companies offering [E&O], so it’s supply and demand,” said Ken Schneider, vice president of product development for Burns & Wilcox. “Now the net effect is that there’s the same numbers, not more agents out there, there are fewer companies in the hard market offering it, and they’ve had a lot of claims in the recent past. All of those variables are driving up the cost of E&O insurance.

“But the other driving factor is reinsurance. Ultimately that’s what drives the whole boat anyway. The availability of reinsurers who are willing to write this business for insurance companies has gone down,” Schneider added.

John Bessey, owner of Thousand Oaks, Calif.-based Primary & Excess Insurance Services Inc. attributed the restricted market to the problems in the industry before Sept. 11, and the problems that have compounded since then. “Since then it has really gone into a spiral so that the underwriters who are out there are really able to pick and choose those types of situations they want to entertain.”

Hyland cited excessive litigation as a big cost driver in the E&O market. “If they could just half litigation costs,” he said, “the rates on E&O would go down anywhere from 38 to 45 percent.” Hyland said that while the advent of the electronic age has in many ways been good for the industry, it has also opened the door to a number of new exposures agents haven’t seen before. “Obviously the legal community has stayed on top of that,” he added. “Unless litigation costs are regulated and controlled, it’s going to be very difficult to get a handle on this thing.”

So how are agents handling the lack of availability in the E&O market? “At the end of the day they are probably buying lower limits, buying less insurance,” Schneider said. “Whereas before they may have bought a $5 million or $10 million dollar occurrence limit, now they can only afford a $2 million limit depending on their size. That’s really how they’re managing it. They’re not as well protected.”

“Even agencies with no claims may have seen their E&O premiums jump 100 percent or more in the last three years, sometimes for policies that provide lower limits, higher deductibles, and reduced coverage,” Surles added.

Tight underwriting means even more diligence for an agent. Surles had several tips for submitting applications, the first being to submit completed applications. He also recommended submitting company loss runs with an application if you’ve experienced a claim or reported an incident in the past five years. “Provide a narrative on each claim or incident, including a summary of the allegations, status or disposition of the claim, and brief comments on what new procedures the agency has implemented to prevent a similar claim in the future,” he said.

For new agencies, Surles recommended that agents and brokers submit resumes on key agency personnel, along with a business plan describing the agency’s formation and long-term business strategy.

“It’s OK to shop around, but don’t change carriers just to save a few dollars,” Surles added. “Consider carefully the stability of the carrier and the agency providing the coverage, as well as the services they have provided to you in the past. E&O policies are ‘claims-made.’ If you switch carriers and later turn in a claim involving an incident you knew about prior to switching carriers, the new company may deny the claim. Watch your retroactive dates carefully and don’t let a new carrier advance the retroactive date unless you have purchased ‘tail’ coverage from the previous carrier.”

Protect yourself
Bottom line, agents and brokers need to take extra precautions to minimize their risk to E&O claims. There are many things you can do to protect yourself, and if you haven’t already, Schneider recommends performing risk management on your own processes. “See what could potentially or not potentially cause a claim. [The agent] needs to properly understand what the insurer is selling as well as what they’re placing on behalf of the insured. Agencies need to be very careful and be sure that people in their offices are doing that as well. The last thing that you want to happen with these things is to have a lot of verbal communication over the phone,” he said.

The most significant thing you can do to minimize your exposure to E&O claims is to document everything—in writing. “You have to be diligent with maintaining your files,” Heisler said. “Whenever you pick up a file think about if an attorney has to go into it to reconstruct your file. If you did nothing wrong, are you going to be able to defend us with that? Just disseminating information, every time you talk to someone or you write an insurance policy or you give a quote, that’s a potential loss. Document your files, make it orderly and make it clear. If you die, am I able to pick up this file and know where you were at? Will I know what your intent was? It all just means litigating your exposure before the loss happens. You can be sued for anything and you did nothing wrong. Proving that you’re innocent is another thing, that’s when you rack up the defense costs.”

Pay attention to the financial strength ratings of the insurance companies providing E&O—for both yourself and your clients. Agents are susceptible to E&O claims from their insureds if they place an insured under a company that later goes insolvent … the insured will likely go after the agent for placing them with a “bad” company. That’s why it’s important to only place business for yourself and your clients with a financially solid company.

Additionally, Surles recommends taking advantage of E&O loss control information. “At IIAT, we provide E&O loss control classes throughout the year and maintain an encyclopedia of loss control information on our Web sites. All except the smallest agencies should consider obtaining the services of an E&O loss control consultant for a detailed loss control procedures audit. Most E&O carriers give premium discounts to agencies that participate in formal loss control training.”

Finally, Surles recommends maintaining an agency procedures manual and ensuring that all staff members abide by it. “This may be the most important ‘hint’ of all, because it incorporates all of the above into a unified document which helps agency managers make and enforce the ‘rules’ by which each staff person’s performance is measured,” he said.