Homeowners not the Only Line of Coverage Affected by Texas Weather

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It’s well known that Texas has some of the highest homeowners premiums in the nation — in large part due to the state’s vulnerability to violent weather. It may be less known that Texas has some of the highest insurance agent errors and omissions premium rates in the country largely for the same reason.

While the bad news is that Texas traditionally has been at the top of the E&O premium heap, the good news is that “we’re not in that number one slot anymore,” said Jennifer Fudge, associate director of IIAT Advantage for the Independent Insurance Agents of Texas.

Fudge cited improved response to claims handling on the part of agents as one factor in toppling Texas off the top spot. Tort reform is another factor, as Texas traditionally been known to have some tough venues for claims losses.

There are three primary sources of management liability for an insurance agency, Fudge said during a presentation at the IIAT’s Joe Vincent Management Seminar, held in Austin in late January. Those are: professional E&O liability, employment practices liability and data breach.

Obviously “E&O creates not only the highest direct cost but it also has the highest exposure,” Fudge said.

Direct costs primarily include premium, deductibles and retained losses, with E&O premium being the highest of the three, she said.

Location Matters

E&O insurance carriers use territorial rating systems in Texas, according to Fudge.

“The first one is the most obvious, coastal versus noncoastal. We’re all kind of used to that. The coastal rates are going to be higher than in the interior. And that’s true because the exposures are higher down there, they have higher loss ratios down on the coast,” she said.

There are, however, two other important rating criteria — jurisdictions and grudge ratings.

“If an E&O carrier has to take one of your cases to court, the jurisdiction will have a significant impact on the outcome,” Fudge said. For instance, the Rio Grande Valley and some counties in the interior are notable for litigation outcomes that are less than favorable to insurers.

Grudge ratings, as Fudge has dubbed them, are those in which the carrier hikes the rating in a particular county because of a previous high profile E&O loss there.

“Bexar County suffers from grudge rating for a couple of carriers,” Fudge said.

Lines of Business Matter, Too

Agents that place higher risk lines of business such as windstorm, flood, professional liability, bonds, trucking, and oil and gas will likely see higher E&O rates as well, as these accounts tend to be more complicated.

There is, however, “a loophole for these high risk lines of business,” Fudge said, “and in that loophole are agents who specialize. What an E&O carrier is going to avoid, and where you’re going to find it in underwriting and in your rating, are what they call dabblers.”

For example, a dabbler might be an agent who writes primarily personal lines and one large oil and gas account, she said.

“What an E&O carrier wants to see is that if you’re going to write these higher risk lines of business that you have the expertise and the loss ratios to handle these higher lines,” Fudge said.

“Some E&O carriers show a very high propensity for certain types of agencies too,” said IIAT E&O Specialist Gunnar Kephart, who participated in the presentation along with Fudge.

For instance, some carriers prefer personal lines agencies and they can be very aggressive, he said.

EPL, Data Breach

Purchasing employer professional liability and data breach coverage as extensions to the agency’s E&O policy is not the best way to go, according to both Fudge and Kephart

By securing EPL as a standalone policy, “you get a lot higher limits; you get underwriters that will extend you better coverage than on an extension,” Kephart said. “And you tend to have better claims handling from the carriers that specialize in EPL.”

Data breach is a new emerging coverage; premiums are inexpensive and carriers are still trying to define coverage — two good reasons to buy it as a standalone policy, Fudge said. In addition, agency exposures to data breach compared to other industries are relatively minimal.

“This is an inexpensive coverage right now,” she said. “You’re probably going to be looking at anywhere from a million dollars in coverage for upward of a $1,000 in premium; $250,000 for $250.”

The primary direct cost resulting from a data breach is the cost of notification, which range can range from $2 to $20 per notification. If an agency’s entire database has to be notified, the cost can rise quickly.

Fudge predicted premiums for this type of coverage will rise as claims history develops.

It’s Personal

In the end, “every E&O claim is personal,” Fudge said. According to Swiss Re, “the emotional stages of an E&O claim are similar to grief — denial, anger, bargaining, depression, etc. and that’s absolutely true … that’s because it is personal. For someone to allege a wrongful act by an agent means they’re attacking your integrity. … They’re coming after you,” she said.

Common Allegations Against Agents in an E&O Claim

Failure to procure appropriate or adequate limits
Failure to advise of policy exclusions or limitations
Negligent determination of inappropriate property values
Failure to advise about co-insurance
Negligent misrepresentation of coverage
Failure to handle claims properly causing carrier denial
Breach of fiduciary duty
Exceeding binding authority or binding unacceptable risk – this is a carrier claim against an agent. These are increasing and there are policies that exclude this
Failure to properly handle coverage for additional insureds and certificate holders
Holding an agent out as an expert
Failure to explain audit provisions

Though an insurance policy may not directly help in healing emotional wounds, it’s imperative to try and get the best coverage available.

And though an agent may not succeed in getting every one of them, there are “things to ask for on the policy,” Fudge said. “There isn’t an agent out there with every one of these things on the policy and it’s not cost effective to do that. … This is really where you’re going to start to mediate some of these costs.”

In a choice between a claims made and a claims made and reported policy, try and secure a pure claims made policy, Fudge said. “It gives you a lot more open time for that claim to be turned in … so to search out and find a pure claims made policy especially on your E&O, I think is vitally important.”

Whether the policy offers defense costs inside or outside the policy limits is another important consideration. It’s more difficult now to secure defense costs outside the policy limits in an E&O policy, Kephart said. So, if that’s not available it’s important to try and figure out what how much to increase the policy limit to adjust for the lack of additional defense money.

“Let’s say you’re used to buying million dollar limits and your defense costs are inside the limits, it would be easy to think that you might have a complicated claim that costs $500,000 to defend,” he said. “You’ve got a million dollar limit. It goes to the jury and the jury awards to the claimant $750,000. You paid $500,000 for defense [and] you only have $500,000 left from the company. So, you’re now on the hook for $250,000.”

Defense costs generally account for 33 percent of the typical claim, Kephart said. The rest goes to pay the settlement.

“That means if you were buying a $2 million policy with the defense costs inside the limits and you were used to buying $2 million with defense costs on the outside … you would need to increase it by a third, so $3 million,” he said.

As for deductibles, a first dollar deductible is preferable over a first dollar loss deductible, Fudge said. “If you’re offered a first dollar deductible, take it. It’s going to cost you a little more, but not nearly in proportion to the savings you’re going to have if you actually have a claim,” she said.

“If you are on a first dollar loss, ask for a first dollar … Unfortunately for coastal agents we can ask as long as we want but we just won’t be able to get it,” Fudge said.