Time Is Right to Review Agency E&O Limits

Fewer independent agencies are facing increased premiums for their agency errors and omissions (E&O) coverage and some experts say that is one reason they should consider upping coverage limits at their next renewal.

Insurance Journal’s exclusive 2015 Agency E&O Survey found that less than half of all agencies (48.2 percent) saw an E&O premium increase in 2014 compared to 2013, while 37.1 percent reported their premiums stayed the same. Only 14.6 percent reported an E&O premium decrease during that same period.

The percentage facing increases is down from the last survey, which found 56 percent of agencies reported premium increases in 2013. Only 32 percent reported premiums staying the same in 2013 and just 12 percent saw decreases.

That stability in pricing is a strong sign of a competitive market, say agency E&O experts, and agencies should be taking advantage of current market conditions.

“There is a lot of competition in the agency E&O market,” says Curtis Pearsall, president of Pearsall Associates Inc., a risk management consulting firm specializing agency E&O, and a special consultant to the Utica National Agents E&O program.

Sabrena Sally, head of Swiss Re Corporate Solution’s U.S. Agents E&O program, which serves as an underwriting carrier for the Big “I’s” Professional Liability Program, says with the competitive nature of the E&O market today, now is the time for agencies to secure higher E&O limits at a good price.

Pearsall agrees now is a good time to review E&O limits. In his view, limits for agencies of all sizes can be insufficient in today’s litigious environment if they have not been updated.

Are agents listening to this advice?

The vast majority of agencies (88.9 percent) did not increase their E&O limits at their last renewal, according to Insurance Journal’s exclusive 2015 Agency E&O Survey for which nearly 600 agency owners shared their view on the market.

Bob Sargent, president and CEO Tennant Risk Services, has not seen many agencies wanting to increase agency E&O limits. “We see some interest but it is clearly driven by size,” he said. “Larger operations definitely want significant E&O limits, but the overall percentage of clients that actually want to increase their agency E&O limits is low.”

Misconception on Limits

E&O experts say that smaller agencies often believe that higher E&O limits are unnecessary, but that’s a huge misconception.

It’s a fallacy to believe that small agencies can’t cause big E&O claims, Pearsall said. “I’ve seen some very small agencies be the cause of multi-million dollar E&O claims. Size is not a predictor of what your E&O limit should be,” he said.

According to the Insurance Journal survey, slightly more than half of respondents (57.0 percent) revealed purchasing $2 million or less per claim in E&O limits. Another 17.5 percent said they purchased $5 million per claim.

Pearsall counsels that $2 million per claim should be considered the bare minimum and in his view this is “on the low side” for coverage.

Even small agencies should be considering limits within the $3 million to $5 million limit range per claim, he said. However if an agency is heavy in commercial lines accounts, they should up their E&O limits even further, he added.

Pearsall urges agents to look at the cost to add higher limits when E&O policies come up for renewal. In today’s competitive market, raising limits may be easier than expected.

“I encourage agents to talk to their underwriter for some options,” he said. “If they have $2 million/$6 million, ask what it would cost for $3 million/$6 million, or $4 million/$6 million and then they can make a determination. Most tend to renew as is and I think that may not be enough quite frankly.”

Pearsall thinks the competition in the E&O market may also be leading some agents to consider changing their E&O market, although he cautions that’s not always a good idea.

Insurance Journal’s survey found that most agencies (59.2 percent) have had the same E&O carrier for at least the past five years, but that 36.7 percent have had two carriers in the past five years. Of those agencies that shopped their E&O coverage, 25.5 percent said the reason they shopped was for a lower price. Some 8.8 percent shopped for broader coverage.

“When you talk about pricing, agents tend to gravitate toward lower pricing but what agents need to be very cautious of – particularly when it comes to professional liability and in agency E&O – is that no two policies are the same,” Pearsall said.

Pearsall advised an agency six months ago and found a significant gap in its E&O coverage. After reviewing the agency’s E&O policy, he noticed there was an exclusion on “surplus lines placements.” The agency owner said: “‘You are kidding me?’ And I said no, it’s excluded under your policy. He had never read his E&O policy.”

Pearsall encourages agency owners to read their E&O policies to see if they cover the activities they are doing on a day-to-day basis. “You could get a policy that is cheaper but if it doesn’t cover what you do, what good is it?” he said.

Swiss Re’s Sally says agents should examine their own insurance policies in the same manner that they would for any of their clients’ policies.

“Review your operations,” she said. “Has your agency grown? Have you changed the kind of customers that you are serving? Has there been a change in ownership structure of your agency? All those things should be look at.”

A Look at E&O Claims

A slight majority (52.1 percent) of respondents to the Insurance Journal survey reported never having an E&O claim, but nearly a quarter (22.1 percent) of respondents said they have had an E&O claim in the past five years.

Pearsall says that overall claims activity for the E&O market continues to be “fairly low” compared with 10 to 20 years ago, a trend he attributes to a focus on solid risk management practices by agencies to reduce their E&O exposures.

When claims do arise commercial lines tend to generate the most E&O incidents, he says. “In commercial liability the industry is still talking about additional insured issues. In commercial property, valuation continues to be an issue.”

Workers’ compensation generates around 8 percent to 10 percent of E&O claims, Pearsall said, while professional liability brings in around 6 percent to 8 percent of E&O claims – but those claims tend to be the “really big claims.”

Sally says the leading cause of agency E&O claims for the past two decades has continued to be failure to place coverage.

Sargent adds that it’s important to remember that that includes failure to place the coverage the insured thinks they requested.

“A lot of times it’s not failure to place the coverage; it’s that the policy doesn’t cover a claim,” Sargent said. This is where it “gets sticky.” The client may have had an expectation after the fact that the policy would have covered the claim but there was no discussion of that type of coverage before the claim occurred, he said. “It’s not that the policy wasn’t in place.”

Sally sees another concerning trend in agency E&O claims – natural catastrophe related claims.

“Natural catastrophes almost serve as unplanned audits of agency E&O practices and also of disaster recovery procedures,” she said. “When a catastrophe occurs underlying issues might be quickly uncovered because clients are experiencing claims.”

Catastrophes also give plaintiff attorneys an opportunity to “stir the pot” and encourage insureds to look for recovery – and that often includes recovery from their insurance agents, she said. It has become almost commonplace to see a rise in agency E&O claims following natural catastrophe events, she said.

Even when agencies do nothing wrong, the cost to defend an E&O allegation can be a huge burden.

“In insurance agency E&O a very large percentage of total incurred losses are defense costs,” Sargent said. “It’s not just loss dollars and claims due to error; it’s that expectations may not have been met and the carriers declined the claim for some reason and then everybody gets dragged in – including the agent even though they didn’t make a mistake.”

Sargent says it’s important for agency owners to understand that they don’t buy E&O just for an error. “You also buy it for defense costs and the protection and resources it provides for the agency.”

Buying agency E&O is not to be taken lightly, Pearsall said. “To me it’s one of the most important decisions an agent will make over the course of a year.”

To Specialize or Not

The trend to specialize is nothing new but it is one that has produced a bit of heartache, the experts say.

According to the Insurance Journal survey, more than a third (38.8 percent) of the agencies responding said their agency is a specialist in a particular market sector/industry. But publicizing that specialization or expertise might serve as a “double-edged sword” should an E&O claim arise, Sally said.

“If we have an insured that’s specializing in an area and they have a good claims history and we review their agency processes and procedures, it tells us they are very good at what they do and that gives us a comfort level,” she said. “At the same time if they are facing an E&O claim the fact that they are a specialist, particularly if they advertise that way, can be quickly become a wedge used by the plaintiffs in an attempt to hold the agency to a higher standard of care.”

Sally sees plaintiffs’ counsel reviewing agency websites more often, “taking verbatim language that agencies have used” to tout their expertise. Websites claiming to “get you the best coverage or no risk uncovered” could wind up hurting an agency during an E&O case, she said.

Pearsall has also witnessed this trend. “When you start putting yourself out there as a specialist or as an expert on your website, you have now put yourself out there that that’s the task you will perform,” Pearsall said. “I have noticed numerous times with my expert witness work where the agency’s website will come into play and could significantly alter the degree of legal liability that the agent is held to.”

Agents need to be careful how they advertise themselves to the public, he added, and should avoid words like expert, specialist or phrases such as “we’ll make sure you are properly covered.”

“Those can be very dangerous words or phrases that could come into play when determining whether an agency is held to be legally liable in a claim,” according to Pearsall.

Agencies should feel good about advertising what they are good at providing but should avoid language that could hold them to a higher standard of care, says Sally. She advises agents to involve an attorney who is qualified in agency E&O to review the agency’s website language. “No reason to increase your exposure when you don’t need to,” she said.

“You want to be an expert – just be careful on how you put that into words,” Pearsall adds.

Insurance Journal wishes to thank Demotech Inc. for providing analysis once again for this year’s Agency E&O Survey.

Topics Agencies Claims