Risks in a Bad Economy

By | February 21, 2010

Agents Take Note of New Errors and Omissions Exposures

The current economic turmoil is wreaking havoc across the board. Businesses are downsizing or going out of business. Families are suffering from lost jobs and financial woes. The insurance industry has taken its own hits. Agencies and brokers need to dance on the head of a pin to survive.

Aside from daily business challenges faced by owners today, there are additional concerns that need to be addressed related to the economic downturn. Today’s financial upheaval has created new potential errors and omissions (E&O) issues and risk exposures.

Agencies need to be aware of the current trends and how this might impact their clients’ coverage needs. The following are a few areas to explore.

Vacant Buildings

The trend of business failures and corporate downsizing has led to many commercial buildings being totally or partially vacant. A property owner might not realize that the insurance industry has a specific definition for vacancy.

When the insured is a building owner or general lessee, the building is considered vacant unless at least 31 percent of the total square footage is rented to a lessee or sub-lessee. If the insured is a tenant and the policy covers that insured’s property interest, the building is considered vacant when it no longer contains enough business personal property to conduct the customary operations of the insured tenant.

This is an area that agencies need to discuss with their clients. Because the specific definition on vacancy might differ from their perception of what it means, clients might not be aware of the impact on coverage if there is a loss.

Collections and Cancellations

Money is tight for many businesses today. Clients are paying late or not at all in order to maintain some cash flow. The dilemma some agencies face is the decision to front money for premiums in order to retain a client, or risk losing that client.

When agencies insert themselves in the middle of the collection process, it often sets up discrepancies in how different clients are treated. Some key accounts might get special treatment and others are left to fend for themselves. Agencies might also send cancellation notices to some clients and not others.

Both of these practices could lead to an E&O claim by a client if a policy is cancelled and the insured has a claim. They could claim that the agency did not give them the same level of service as it did for other clients.

Reduction in Coverage and Reduction in Limits

Businesses are looking for all sorts of ways to cut expenses. Dropping coverages and lowering limits is often a very attractive alternative to not making payroll. Agencies need to be aware of changes made by clients to their insurance and provide them with the advice of the ramifications.

How would it look to a jury if the insured said that their insurance advisor made no comments when the insured made massive changes in coverage?


Suppose a client gets a nice large premium notice after a workers’ comp audit. Again, since money is tight, they might fail to make a prompt payment and coverage could be dropped.

Home Based Businesses

With the increase in unemployment, more and more people are starting their own businesses and running them out of their homes. Many of these people fail to secure a separate commercial policy for their business and rely on their homeowners’ policy to provide some coverage for their business risks. Needless to say, this can be woefully inadequate.

Some businesses just evolve over time and might not be considered a true business by the owners. For example, to help make ends meet, one family might offer to watch the children of another family or several families for some quid pro quo. As a minimum, the family should have a home daycare coverage endorsement.

A person might also have a hobby that grows into a business, such as small engine repair, which they operate out of their home or garage. Again, this leads to uninsured risks. Agencies need to ask their clients the right questions to uncover these situations.

How about a homeowner who rents out their garage? The renter initially uses the space to store and work on their own car. Overtime, they take on a few jobs so they can make ends meet. Now the homeowner has a structure where a business is conducted. Did the homeowner and their insurance agent discuss the risks involved?

Boomerang Kids and Extended Families

The recession has caused many adult children and their families to move back home with their parents. Homeowners need to be aware of the impact this might have on increased exposure, such as the increase in the amount of personal property in the home.

Non Traditional Families and Households

Less than 50 percent of households in the United States today are headed by a married couple. Yet, homeowner policies are written for the named insured and their resident spouse (auto policies use the term family members). What would happen if a client’s live-in partner has a situation that triggers a claim, but they were not added as a named insured?

Final Thoughts

E&O exposures are never a fixed target. The current bad economy has created new challenges for agencies for their own risk management. A huge step to reduce the exposure is to be diligent in regular communication with clients. Finding out what is happening in their lives and their businesses will uncover changes they might have in risks and the resulting insurance needs.

Topics Agencies Homeowners Professional Liability

About Catherine Oak and Bill Schoeffler

Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Schoeffler is an associate of the firm. Oak & Associates. Phone: 707-935-6565. Email: catoak@gmail.com. More from Catherine Oak and Bill Schoeffler

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