Agents in E&O Buyer’s Seat

If ever there was a time for insurance agents to get out and go looking for a better errors and omissions policy, this is the season.

Agents who do will come across several admitted carriers that are welcoming new business and surplus lines writers happy to cover what the standard carriers won’t.

They will run into some players with established roots and others just recently planted in the field ready to quote.

They will find two national trade groups with E&O programs vying for their business.

And with very little digging, they will uncover insurers willing to trim their prices, despite continuing fallout from lawsuits relating to flood coverage.

There are plenty of providers from which agents may choose because the agent E&O marketplace has become a major specialty class. There are 37,500 independent agencies, according to the 2006 Agency Universe Study put out by the Independent Insurance Agents and Brokers of America (IIABA). The E&O marketplace for these businesses represents an estimated $500 million in written premiums.

Mark Henderson of Shand Morahan, Sabrena Sally of Westport, Gary Mann of Fireman’s Fund, Mark Wolf of the IIABA, and Mike Auerbach of Liberty International Underwriters are among the active players in today’s agency E&O buyer’s market.

Classic soft market

Wolf, assistant vice president and head of E&O Operations with the IIABA, in Alexandria, Va., claims that today’s market is exhibiting what he considers to be the “classic patterns” of a soft market.

He’s seen “lower pricing and carriers coming in that hadn’t been in this business before.”

That can be a good thing. “They’re driving prices down,” he said.

But agents would be smart not to dillydally. “The market could turn quickly,” he added.

Wolf warns that if “rates are insufficient to the point that their prices are (inadequate) to support future claims,” then that’s just “helping to set the stage for the next hard market.”

Sally, who is senior vice president of Swiss Re subsidiary Westport Insurance Corp., which supplies the paper for the IIABA agents E&O program, acknowledges the market is “very” soft.

“We’re seeing prices falling substantially for the better risks and new players coming into the market,” she said. She named Great American and Paco as two markets “that to the best of my knowledge hadn’t been very active in this class before, but they are now.”

Shand Morahan’s Henderson views market conditions from a slightly different perspective, that of the surplus lines industry, from which he serves the more difficult risks.

While during the past two years E&O prices have started to soften for mainstream risks, that hasn’t necessarily been the case for some of the “hard-to-place business” that Henderson sees, according to this agents E&O product line manager for Shand Morahan, Evanston’s exclusive underwriting manager.

Specialty agencies, including those specializing in aviation, trucking and other hard-to-place risks, program administrators, surety bond specialists, and wholesalers can be tough to place, according to Henderson.

Henderson’s company is among those that hasn’t reduced prices. “And we don’t expect to,” he says. “Evanston is among the surplus lines carriers that don’t haggle over E&O pricing with customers.”

Test of time

Standard carriers think they have the leg up on their competitors from surplus lines and some of the new entrants into the market.

“I think admitted markets like us are still enjoying a competitive edge because of our broader terms and better pricing than our surplus lines market counterparts,” says Fireman’s Fund’s Mann.

Also certain surplus lines players “are coming in with barebones coverages and the rates are seemingly attractive, but their capacity to absorb those claims is untested,” claims the Fireman’s Fund product manager for insurance agents E&O.

Mike Auerbach, assistant vice president of professional liability programs for Liberty International Underwriters, a division of Liberty Mutual Group, in New York, has seen a soft market or two in his 15 years of underwriting agents E&O business. He says that agent E&O players are dangling premium savings of 10 percent to 15 percent or more for the better risks. This is something he worries about.

“There are professional liability underwriters who even go lower, and that baffles me because the profit margins are pretty thin,” says Auerbach.

Auerbach believes that there are “some carriers who are coming into this specialty class to garner market share despite soft rates that strain the boundaries of profitability. It’s likely that they’ll find out within a few years whether what they’re doing now will come back to haunt them.”

Liberty competes for mid-sized to larger agents. Its E&O underwriting appetite includes agents, brokers, managing general agencies, wholesalers, program administrators, and more.

“We can’t charge enough money to do small mom-and-pop agencies,” Auerbach admits.

Liberty Mutual also competes against surplus lines markets such as Lloyd’s and AIG unit Lexington for managing general agencies and other such risks. Auerbach singles out CNA, Utica and Westport as among the admitted players going after smaller risks.

Auerbach describes insurance agents E&O as “a microcosm” of the industry, by which he means that agents E&O will likely follow the pricing trend of the overall industry.

According to Auerbach, not all players can survive in this E&O market. “The companies that specialize in the business and understand how to appropriately underwrite a risk stand the best chance of staying in the market over the long haul whether conditions are hard or soft,” he maintained.

One of the nation’s largest agents E&O carriers, Fireman’s Fund distinguishes itself by covering both life insurance and P/C agents. “Many of our competitors will do one or the other but not both,” said Mann.

Mann says offering coverage to both life and P/C agents can be of value since more P/C agents are selling life insurance due to cross-selling opportunities in personal lines.

Mann notes he is also seeing more mergers between P/C agencies and life agencies, and he is also finding more agents who are trying to diversify their income bases.

Missing out

Most agents and experts consider E&O coverage a necessity for an agency today.

“We’re in an increasingly litigious environment,” says Claire Wilkinson, vice president-global issues, at the Insurance Information Institute, in New York. “There’s definitely an uptick in the number of agents buying insurance, in part because of the litigious environment. It’s essential for them to have adequate coverage.”

“At this agency, we wouldn’t think of operating without suitable coverage,” says Jim Armitage, vice president of multi-lines agency Arroyo Insurance Services, in suburban Los Angeles. “In this litigious climate, people sue at the drop of a hat, and you need to have insurance protection.”

Allan Bernstein in Walnut Creek, Calif., has trouble understanding why any agency would go bare.

“We wouldn’t even dream of doing that,” said Bernstein, vice president of TLB Insurance Services. “The risk is horrendous; it’s hard to believe anybody would operate in the insurance profession without suitable coverage.”

Bernstein sees it this way even though he himself has not faced E&O-related litigation, “I have read about cases in the trade journals … If someone sues an insurance company, he or she could name his or her agent in the suit, so you simply must have E&O insurance to cover defense costs, (and) any possible judgment or settlements for that matter,” he says.

Carrier requirements

It’s also unwise for an agent to skip buying E&O because many carriers require it.

“Even if you could get away with it,” warns Mann of Fireman’s Fund, “it’s not worth it because you would at the very least lose your company appointment. But beyond that, you could lose everything including your house and your business if you get sued and have no E&O protection.”

Mann’s warning resonates with Shand Morahan’s Henderson. “You might be accused of providing inadequate limits or failing to recommend an important coverage,” he said.

He cited recent history to make his point. “Hurricane Katrina victims have been suing their homeowner insurance companies and their agents for, among other things, failing to recommend the purchase of flood insurance.”

He says that he knows of a south Florida mainstream commercial lines agency with a $15,000 E&O liability premium and $1 million in written premiums whose carrier paid out $3.3 million in Katrina-related claims. Not surprisingly, the agency’s E&O policy was nonrenewed, and the agency “is shopping the surplus lines market to find coverage.” Evanston is among the surplus lines carriers that is considering the account.

Henderson predicts such claims will be seen for many years to come.

“Litigation from hurricane, flood and other weather-related claims will clog up insurance company claims offices and courts on a long-term basis. Katrina claim cases will go on for years and years. It’s a flood of litigation, it’s here to stay and it’s only going to get bigger.”

Agents without E&O insurance stand to lose their homes, their businesses and their collectible personal assets, although that may not matter. “A lot of plaintiff attorneys won’t sue them, because they realize that it’s a losing proposition,” he said. “That’s because these types of agents, the ones who don’t have professional liability, are ones who just might hide assets offshore, close their shops and move on.”

Almost as foolish as going bare is not having enough E&O coverage.

Henderson believes agents are underinsured if they have only $1 million in E&O limits because they insure huge valuations and huge liability exposures.

“Maybe $1 million was adequate in 1980, but not anymore,” he said.

He advises agents to increase limits to at least $2 million, even $5 million.

“Agents need to understand their exposures might be much higher than they think they are,” he said. “So they should buy as high a limit as they can afford. A $1 million limit isn’t adequate for agents in these litigious times.”

Henderson’s comments are especially true for agents in California, which is considered the litigation capital of the country. Given the rate of litigation combined with the high valuations of commercial and residential properties, carrying only $1 million in limits is shortsighted, Henderson says. Defense costs alone could run from $100,000 to $500,000 depending on the complexity of a case, he noted.

Topics Lawsuits Carriers Agencies Claims Excess Surplus Flood Underwriting Market Property Casualty