Agency owners have a lot to protect. Of course, first and foremost they must protect their clients.
But they must also protect their book of business. They must protect their relationships. They must protect their reputation in the community they serve.
One way agency owners protect themselves and their business is by purchasing agency errors and omissions coverage. Most independent insurance agencies and brokerages purchase E&O coverage today, but why do they buy it? What are they actually protecting with E&O coverage?
The vast majority of agency owners (86.5 percent) say they buy agency E&O coverage to protect the assets of their agency, according to Insurance Journal’s 2011 Agency E&O Survey.
Protecting an agency’s assets — financial and possibly even reputational assets — is why most agency owners choose to buy E&O, the experts agree. But these same experts warn that their E&O policy may not cover everything agents think it covers.
“If an agent makes a mistake in anything that they do on behalf of a client, and the insurance company ends up not covering it, they’re responsible for it,” says Al Diamond, president of Agency Consulting Group in Cherry Hill, N.J. “They’re basically acting as the primary insurer for their clients if the insurance companies don’t cover the losses that occur within their agency.”
Diamond says even frivolous lawsuits can be costly for agency owners. “And there are an awful lot of them these days that need to be defended and E&O will cover that.”
Most agencies buy E&O coverage to avoid paying out those large losses from their own pocket, says Chris Burand, founder and owner of Burand & Associates LLC, based in Pueblo, Colo.
“In most cases, agencies don’t have enough cash on hand to pay those losses,” he said. “They would have to sell their book of business, or some portion of their book of business, or even their entire agency, in order to pay the claim if they didn’t have E&O insurance,” Burand said.
Diamond says the asset agency owners want to protect the most is the agency’s book of business.
“The revenue stream created by the book of business is their greatest asset,” he says. Diamond agrees that most agencies are cash poor businesses, with little in the way of funds to pay out claims on hand. “The bulk of the value of an agency is in this book of the business. … 90 percent to 95 percent of the value of an agency is in its book of business.”
But while good E&O coverage may be important to protect an agency’s financial assets, the coverage does nothing to protect an agency’s reputation, according to Burand.
“E&O insurance does not protect their reputation and that’s a big deal,” Burand said.
Curtis Pearsall, president of Pearsall Associates Inc. who is also a special consultant to the Utica National Agents E&O program, has seen E&O claims appearing in local press that can be very damaging to an agency’s reputation.
For example, if the agency erred when insuring a local school, local press would be more apt to pick up a news story where the agency might be exposed further.
“The agency insured a school, and all of a sudden, the claim isn’t covered. Now, all of a sudden, that appears in the local paper that the school suffered a loss that wasn’t covered by insurance written through such and such an agency,” Pearsall said. “It certainly will hurt the reputation of that agency.”
Reputational damage resulting from an E&O claims may have some unexpected consequences.
“It could potentially impact the ability of the agency to make necessary changes, not only hiring people, but hiring the right people,” Pearsall says. “When a claim is made against an agency, if they don’t have any E&O, they’re really potentially sacrificing everything they have worked to build. Why would they do that?” Transfer the risk to insurance via an E&O policy and agency owners can sleep better at night, he says.
One defensive tactic to guard against reputation damage could be an E&O audit, says Burand.
“That’s really where E&O audits come into play,” Burand says. “That’s one of the key reasons agencies should pay for E&O audits; because an audit does more to protect their reputation by helping them with risk management than an E&O policy does. … It’s their only protection for reputational damage.”
Altruistic E&O Buyer
A small portion of the Agency E&O Survey respondents, 13.3 percent, reported that they buy E&O mainly because their carrier partners require it.
This is not the best reason agencies should buy coverage, says Tony Messec, president of Western E&O Brokers in Albuquerque, N.M., an independent insurance agency that specializes in insurance agents’ and brokers’ E&O coverage.
Messec agrees that agency E&O coverage is important when it comes to protecting agency assets, but he says asset protection should only be 50 percent of the reason for buying E&O coverage.
“They should not be buying it because their carriers require them by contract to buy it,” Messec says. Agents should buy E&O because it protects their agencies and their clients, he says. Buying E&O to protect clients should be the other 50 percent, Messec adds.
Messec believes there should be an altruistic motivation to buying E&O coverage as well.
“If the agency really and truly has erred and one of their clients is damaged doesn’t that agent want to have some means of making the client whole to the point that the agency should have made them whole if only they had done their job properly? That’s what E&O coverage does,” Messec says.
“It repairs that damage to the client as if the agency had done the job correctly to start with, which to me is an equally valid reason for buying E&O coverage,” he says. “So you could buy for selfish reasons, you could buy for altruistic reasons, or you could buy for both. I prefer the both.”
If protecting the agency and its clients are not reason enough to purchase E&O, the rising number of E&O exposures should serve as motivation to invest in appropriate coverage and limits, experts say.
One area for new E&O exposures is social media, according to Pearsall.
“As agencies get involved with social media, they should make sure that they have a plan in place for how they’re going to use it, and what do they hope to accomplish,” Pearsall says. “Make sure not only the agency is handling their social media presence professionally, but make sure that the staff is not going out there saying negative comments about the competition or about certain customers, things of that nature. It certainly has the potential to get them into an E&O problem.”
“Agents don’t realize what exposure they have right through their Web site and through the social media they use,” Diamond says. “They have to be extremely careful. Once you hit that ‘enter’ button, or once you post something on the Web site, if it offends anyone, you can get sued for it. … Whether you’re joking or not, if you’re critical about them, you face certain lawsuits, and that risks your assets tremendously.”
But Burand says it’s not the technology that’s increasing the E&O exposure; it’s the E&O carrier’s reaction to the technology that’s increasing the exposure as more carriers require encryption as part of E&O policies.
“Agents haven’t read those memos. Agents have not read those clauses,” Burand says. “Those are just phenomenally increasing exposure to agents and most agents have not adopted adequately for it.”
Messec doesn’t see technology as an E&O threat as much as he sees coverage changes as a threat to agents today.
“I’m not quite as concerned with the new method of delivery,” Messec says. “Generally speaking it makes no difference to an insurance agent’s E&O policy whether the policy was sold online or face-to-face in the retail agency’s office.”
Not that there aren’t some new exposures in the technology space, Messec adds. “But those don’t concern me nearly as much as the way in which coverage is changing and expanding,” he says.
“The world of insurance is creating new products, improved products, at a much more rapid rate than it did decades ago and agents have to stay up on all these things to know what their clients need, what’s available for them. And that I believe has increased the exposure to E&O, quite significantly,” Messec says.
It’s not only the newer coverages but also the new exclusions that are creating additional E&O challenges for agencies.
“It’s not just enhancements; it’s changes,” Messec says. “There is just an immense amount that must be known and it is impossible to be an expert in all of them; and it’s very difficult to be competent in all of them.”
Burand cites a traditional business owner policy (BOP) as an example where coverage changes and differences could potentially be an E&O issue.
“There’s a lot of difference in BOPs,” Burand says. “Sometimes they’re real small and sometimes they’re significant. It depends on the client. It depends on the carrier. But there are a lot of differences.”
Burand says it’s an area where he sees that most agencies fail to manage E&O exposures. “If you look at just the vast number of BOPs that exist in any agency, then just by sheer numbers, the fact that they’re moving, that they have that many, there’s a good chance of an uncovered exposure.”
According to Pearsall, there is one particular area of coverage that could come back to bite agents: dogs.
In 2010, the insurance industry paid out more than $410 million in dog bite claims, according to the Insurance Information Institute. “The insurance industry is not going to continue to pay those dollars. They are going to try to find a way to solve the problem, and I believe it’s going to be through tighter underwriting guidelines. They’re going to identify breeds that they’re not going to be willing to cover.”
In today’s world of mixed breeding in dogs, many insureds don’t even know the combination of breeds in a household pet.
“Maybe German Shepherd is one of the excluding classes. If the people don’t know that there’s German Shepherd in the dog, there could be a claim problem down the road if something does happen,” Pearsall warns.
If the agent makes a statement that implies to the customer that there will not be a claim problem because the dog is a mutt, but then the dog bites someone coming on the premises and the carrier then denies the claim because of the breed of the dog, then, all of a sudden, the agency is now going to be faced with a problem for telling the customer that there was coverage, Pearsall said.
But Diamond says the greatest E&O exposure facing agents today might just be renewals. “Don’t let any insurance renewals be renewed as is without having someone competent review them,” Diamond advises. “A small insurance policy, one that doesn’t pay much premium, can still be sued for millions of dollars.”
The good news: 84.1 percent of IJ’s Agency E&O Survey respondents reported that their agency looks to update the exposures of clients at each renewal. The same number of respondents said they have also enhanced the agency’s effort to education customers on insurance issues in the past three years.
Even with the rising number of exposures facing agency E&O today, the market for coverage continues to improve and enhance coverages to better protect agency assets, the experts say.
“Over the 25 plus years that I’ve been doing E&O, coverage has improved in both pricing and availability,” Messec says. “Today’s agency has a much better chance of having solid gold coverage at an affordable price than an agency did 25 years ago.”
Messec says only agencies with underwriting issues see undesirable terms, conditions and higher prices for coverage. But for the most part, it’s a soft market, he adds.
“It’s always a competitive market,” Messec says. “It doesn’t make a difference whether or not it’s a soft market or hard market it’s always competitive.”
The majority of respondents (63.0 percent) to IJ’s Agency E&O Survey reported satisfaction with terms, conditions and limits in their E&O coverage. However, some 74.9 percent reported that their agency had not increased the E&O limit in the past three years.
Pearsall says higher E&O coverage limits should be considered because it could mean the difference between surviving an E&O claim, or not.
“I’m aware of an E&O claim where the agency had E&O, but they didn’t have a high enough limit. They were sued for $3 million, and they only had $1 million of E&O,” Pearsall said. “Now, the claim got settled well within the $1 million, but had it been settled for $3 million that agency probably would have had to sell their operation to pay off the amount of the claim.”
Even though many E&O claims are closed out without payment, one claim could make or break an agency, Diamond says. Having the right E&O limits is critical.
“It’s like life insurance. You may have only one claim, but it’s a doozey. You don’t want to go into it without being protected,” Diamond says.
About the Survey
Insurance Journal’s Agency E&O Survey for 2011, conducted Oct. 5 through Oct. 24, 2011, drew 590 respondents from 49 states. IJ’s official research partner, Columbus, Ohio-based Demotech Inc., provided analysis for the Agency E&O Survey.
There were no respondents from the District of Columbia and Hawaii. The five states with the highest number of respondents were California (14.9 percent), Texas (11.2 percent), Florida (8.6 percent), New York (6.8 percent) and Illinois (5.6 percent).
Total property/casualty premium volume in 2010 was less than $5 million for 49.9 percent of responding agencies; 17.7 percent said their agency’s P/C premium was between $5 million and $10 million; and 14.3 percent had P/C premium between $11 million and $25 million. Some 14.8 percent said P/C premium was between $26 million and $200 million while 2.9 percent reported P/C premium as more than $200 million.
Most agencies (64.5 percent) had between 1-10 full time employees; 26.1 percent had between 11-50 employees; 4.9 percent had between 51-100 employees, while 4.4 percent had more than 100 employees.
The majority of agencies (51.6 percent) responding to the survey reported being in business for more than 30 years.
The average premium volume for all responding agencies was $24 million.