In the September 2001 issue of American AGENT & BROKER, weattempted to forecast the future of insurance agents errors andomissions insurance ("Agent E&O Renewals: Don't Wait Until the11th Hour"). We foresaw the hardening of the market but neverexpected it to get as bad as it was in the mid-1980s. Now themarket is settling down, and we sense a change taking place onceagain. To better understand where we are now, let's begin with abrief overview of what has transpired during the past threeyears.

The hardening of the insurance agents E&O market, whichbegan in 2002 and continued into 2004, accelerated when twoinsurers with significant books of business exited the market.Those two carriers had non- renewed over $40 million in agentsE&O business, and the few remaining markets in that niche alsobecame more selective when underwriting their own books ofbusiness. We saw new exclusions used to tighten policy language,reduced limits, withdrawal from certain sizes and classes ofbusiness and, of course, significant premium increases. MGAs andwholesalers were viewed as poor risks, just as they were in themid-1980s, and many were lucky to get coverage at any price, on anyterms. Underwriters typically had more business than they couldhandle and found it easier to non-renew entire classes than tounderwrite individual risks.

Standard Main Street brokers often were able to renew with theirexisting carriers, although at higher prices. While some insuranceprofessionals complained about pricing and tried to get a betterdeal, they quickly learned that, even with a double-digit increase,they still got good quotes, relatively speaking. A small percentageof agents, oblivious to the hardening market, sought more coverageat lower prices. A few panicked and heavily marketed theirrenewals, sending applications to multiple brokers and/or markets.For example, one account was submitted to us by seven differentproducers. The agent did himself a disservice, though; we couldhardly take seriously one small account coming in from sevensources.

So where is the market now and where is it headed? We see theagents E&O marketplace leveling off. At this point, we think itunlikely that any more major players will exit the market, and wesee no need for additional carriers or capacity. As economistswould say, we believe the market is entering a period ofequilibrium, similar to that seen in the late 1980s. It probablywill be characterized by modest continued price increases, perhapsaveraging 5% to 10% at most, assuming no increase in exposure base.But if your business is up by 50% from last year, don't expect arenewal as expiring!

Terms and conditions will probably remain largely unchanged. Forthe most part, underwriters have already made the changes theywanted and most likely will continue to be selective, with eachpursuing the risks it considers most favorable. Such a trend doesnot bode well for very large operations, nor for MGAs, wholesalersor reinsurance brokers. Other specialty brokers also will continueto face a difficult market.

What should you expect, and what should you do in the next 24months? Let's start with pricing. We believe the market's currentpricing level-while painful for some-is fair and suitable tosustain a long-term viable marketplace. Most increases will bedriven by growth in your operation. We recommend that you focus oncoverage and pay particular attention to policy forms and newendorsements, as some of them can be problematic.

Even good forms can provide inadequate coverage if the agentshandling them are sloppy or inattentive. When completing anapplication, make sure you list the insured's full legal name ornames on the application. If you are incorporated, include "Inc."at the end of your name. If you are "doing business as," theninclude "d/b/a." Avoid abbreviations or partial names, since theensuing policy likely will include the insured's name exactly as itappeared on the application.

If you've changed names, incorporated, merged or acquiredanother agency, keep in mind that most policies cover only theentities named on the policy. It doesn't help to have fullprior-acts coverage if the entities to be covered are listedincorrectly. For example, let's assume you started out as John Doed/b/a ABC Agency in 1996. In 1999 you incorporated and became XYZInc. If your policy gives retro coverage to 1996 but only coversXYZ Inc., then John Doe d/b/a ABC Agency is not covered. While youcan avoid coverage gaps simply by listing both names, we often seerequests to change the insured's name on the policy, rather thanadd the new name. We also see applications for new lines that showthe firm established in 1999 but with a 1996 retro date on thecurrent policy, which clearly indicates something is wrong. Forsimilar reasons, you should pay attention to names and retro datesduring mergers and acquisitions as well. If you simply buy a bookof business (an asset-only purchase), you probably don't want tocover the other entity on your policy-and certainly not foranything it did before your purchase. Be sure to clearlycommunicate as much to your underwriter.

Other issues are equally important. Some, such as insurerinsolvency, get a lot of attention, but you can control this riskby electing not to place coverage with certain carriers or, at thevery least, having your client sign a disclosure statement.Nevertheless, carefully review your E&O policy. Some include"A-" wording, which means the insolvency exclusion does not applyif, at the time of placement, the carrier providing the coveragewas rated A- or higher by A.M. Best. Note that the last three largecarriers to become insolvent were rated A- until close to theirdemise, so "A-" wording would have protected you. Other forms havefull insolvency exclusions, so agents have no coverage under anycircumstances in the event of an insurer insolvency. We've evenseen one form with B+ wording, which seems better on the surface.However, if you read carefully, you'll find it only offers defensecoverage-not indemnity-and then only for a small fraction of theliability limit.

Other, more important, form restrictions attract less attentionthan they should. Two examples are absolute pollution andemployment practices exclusions. We speculate that such exclusionswere meant to apply to pollution caused by the agent, or EPLIclaims arising out of the agent's status as an employer. However,some forms have absolute exclusionary language that appears toexclude claims resulting from the agent's placement of, or failureto place, pollution and EPLI policies for their clients. If such anexclusion exists in your current policy, it's obviously a majorcoverage restriction.

Two more ways some E&O forms reduce coverage are by limitingcoverage to client-only suits, thereby apparently negating coveragefor all claims except those brought by your insureds, and byexcluding prior-acts coverage unless you've had continuous coveragein the past and can prove it. (Do you have copies of your last 20declarations pages?) Review your form carefully, and if you findproblematic wording, ask to have it changed.

What about the long-term stability of the marketplace? Webelieve it depends primarily on underwriters' willingness tomaintain underwriting and pricing discipline. During the lastquarter-century, the underlying fundamentals of agents' E&Oexposures have changed, but not by a great amount or in a suddenway. For all the worries about terrorism, insurer insolvencies,asbestos, etc., the risks have changed along with professionalliability trends and with societal changes in general. E&Ounderwriters, however, especially those with little understandingof the real exposures and no regard for bottom-line results, causedabrupt changes in the market. We can only hope that underwritershave since learned the obvious lesson and, as a result, will avoidsowing the seeds of the next chaotic market cycle in the yearsahead. But as realists, we expect to see pricing begin to erode ina year or two and, at some point, a replay of the 1980s. For thelong-term good of the marketplace, though, we hope we arewrong!

Raymond Wahl is a senior vice president in the West Hartfordoffice of Lee & Mason Financial Services, a managing generalagency. Linda Blechman is an assistant vice president of Lee &Mason.