Professional liability, or errors and omissions as it is also known, is a unique line of business. After all, how many other lines of business have terms like claims made, claims made and reported, retro dates, tail coverage? Not many. On top of that, it is widely known that no two policies are the same, which presents unique challenges, especially when looking to move coverage from one carrier to another. While all of the issues have resulted in a fair number of E&O claims against agents selling this line of business, there are additional issues that agents need to be acutely aware of.
New App Every Year
With most professional liability carriers, there is a requirement that a new application be completed each year. This is not always the case based on the type of professional liability, the nature of the risk and the size of the account. However, for accounts that have professional liability coverage, it is essential that producers factor the possibility of a renewal app into their renewal process.
If a renewal app will be necessary, producers should identify this requirement early on and make sure that they know exactly what app will be necessary. As professional liability carriers update their apps to ensure that they are aware of the exposure, agencies should not count on the fact that last year’s app is still the current one.
Give your carriers sufficient time to underwrite the account. Most professional liability carriers will request the app 30 to 45 days before the expiration date. There may have been times in the past where they were able to turn the app around in less time, but don’t count on it, especially in a hard market where the application activity could be on the rise.
To accomplish this, it will be necessary for the agency producer to meet with the customer approximately 60 days prior to the expiration date to get the necessary application questions completed.
Don’t expect that your account looks the same today as last year. One of the reasons that carriers want a new app on a frequent basis is to make sure that the carrier is aware of any changes in the exposure and that they are comfortable with these changes. This would be comparable to an insurance agency one year selling predominately main street basis on a retail level and the next year being an agency that has developed into a wholesaler specializing in tough classes of business. The E&O carrier may not feel comfortable with the new exposure or may decide to change the pricing, terms and conditions.
There is certainly the possibility that the account will look the same as the prior year, but don’t count on it.
Do not complete the application for the customer. Typically, producers want to make it “easy” for their customers to renew with them so there may be a tendency or desire to complete the application for the customer assuming no changes. Producers should never do this! As noted by the following E&O claim, this has tremendous potential to cause some major issues.
A claim, involving an agency in one state with a resident producer in another, was an extremely complicated matter involving a professional liability policy secured for a commercial real estate broker.
The broker was involved in some real estate transactions that caused some parties investing in real estate to incur large tax liabilities contrary to the advice the broker/client had given to them. The agency, apparently aware of the nature of the risk, sent the risk a very brief application with a signature page. However, the application that they sent to the carrier was much longer and contained many inaccurate answers to the questions. It appeared that the client had not seen those questions and the agent had answered the questions on his own.
When claims started coming in, the carrier initially balked but then subsequently agreed to provide a defense. The carrier then took the position that it would not have written the account had it known the full and true nature of the risk. The carrier, along with the client, then came after the agent. The client stated that had it been asked all of the various questions, it would have provided accurate responses. With damages more than $1.5 million, the E&O claim against the agent was settled for $772,500.
Producers may think that it is an inconvenience for the customer to complete the application, but this is really the best way to secure the “true nature of the risk.” This approach will also provide a significant degree of protection for the agency should a problem develop alleging application inaccuracies.
Just because the professional activity is noted on the app does not mean that it is covered.
Carriers that write professional liability typically have a zone of what exposures they are comfortable with and which ones they are not. Those activities that they are not comfortable with are probably going to be excluded. Some of the exclusions may be able to be “bought back” for a certain premium.
This speaks to the reason why professional liability customers should review the policy in total (not just the exclusions) to determine what activities are covered and which activities are not. This review should be heavily stressed by the producers to remind customers that the policy may not provide coverage for all of the customer’s activities.
Don’t Say It
As mentioned previously, no two E&O policies are the same. If the producer happened to provide multiple professional liability proposals, the producer should not state or imply that the coverage of both of the policies are the same. If the producer is taking the account away from another agent, he should be careful not to state that “this policy is better than what you had.”
In addition, a focus or decision based solely on price would be very short-sighted. Securing specimen policies is extremely important so that a full review can be performed.
Review the Policy
There have been many E&O claims against agents where the professional liability coverage policy contained a “current” retro date when the customer fully needed and was expecting full prior acts coverage. The producer should review the policy to ensure that it reflects what was ordered. The customer also should be requested to review the policy.
Professional liability is serious stuff, and due to its uniqueness, should be treated as such. Anything less has the potential to cause some major E&O issues.