While the recession might be officially over, one thing's for sure: its effects aren't going to disappear overnight. With ample capacity and the insurance market soft, many agencies and producers are still deeply feeling the pinch and will for years to come. Indeed, doing more with less has become the new normal. 
As agencies work hard to keep their heads above water while seeking new avenues of growth, they've likely created a whole host of unintended exposures for E&O claims--from downsizing to diversifying, outsourcing through independent contractors to expanding across state lines, marketing services to engaging in mergers and acquisitions or clustering. Now that the dust has settled a little on the economic crisis, it's time to make doubly sure your house is in order. Here are six areas to consider.
1 Diversifying
One insurance agency begins offering loss control services; another decides to offer employee benefits consulting; while a third offers claims counseling. In search of new sources of revenues, agencies are branching into affiliated services. Having gained a level of familiarity with the industry, brokers often think they know enough about a particular service to advise customers in that area for a fee.
Yet if the agency is faced with a lawsuit from providing the new service, its E&O policy may not cover the cost of defense and damages unless that service was specifically included on the original policy or added later under the description of services performed. In fact, a number of services that brokers now perform--such as risk management consulting--are not included in the standard definition of an agent and broker on their E&O policies. To the surprise of many, some E&O policies don't even include claims-related activity as a service.
Looking for revenue, some firms have hastily launched affiliated services, creating the perfect scenario for allegations of negligence and errors by failing to establish or follow best practices and ensure that employees have sufficient training or product and service knowledge.
Take, for example, an agency with a 10-year track record successfully placing all the property-casualty coverage for an aviation company with a fleet of planes and helicopters. For a fee, it agreed to take on the entire management of the policies, including collection and payment of premiums to the insurance carrier on behalf of the aviation client.
At the time, the downside to offering these new services seemed minimal--after all, a productive relationship between the two companies had been in place for a decade, and the agency had been in the insurance industry for years. It knew what it was doing, right? Not so fast.
One of the insurance policies was cancelled. Without a set of iron-clad procedures in place, the agent dropped the ball and delayed handling it. Then, a helicopter on the cancelled policy crashed. The aviation company sued its long-time agency. Hardly surprising, there was a clear finding of liability because of the additional responsibilities the agency had taken on when agreeing to handle funds and make certain the coverage was in place.
In addition to proper training and procedures, the broker must be sure the scope of professional services stated in the policy actually reflects what is promised. Don't assume that the catch-all language of agent or broker professional services in your existing E&O policy will provide coverage. Also, policies typically state that services will be offered for a fee. When providing pro bono work, which many firms engage in for goodwill or to build a presence in an area of expansion, modify the policy fee language to reflect this.
Even if you don't have a full-up claims handling service, make sure your policy includes some reference to claims handling, claims advocacy, and claims counseling--whichever terms will suffice to insure you won't have an issue with your carrier if someone in your organization mistakenly offers ad hoc advice and is later held liable for misinformation. If it just says agent or broker professional services, you might have an E&O policy that has taken the position that claims advice is not in your role.
Some high-profile insurers have been in the news because of the deterioration of their financial position. Recent lowered investment returns have depressed earnings, adding stress to leveraged balance sheets. As an agent, you are obligated to make sure that coverage placed on behalf of insureds is with a solvent carrier. Some E&O policies exclude insolvency altogether, while others will cover it if certain ratings thresholds are met at the time of placement. Ratings change year to year, so be sure a carrier's rating is still adequate for a particular insured or meets your agency's internal guidelines. Unlike an admitted carrier, using a nonadmitted carrier can be higher risk because they are not backed by state guarantee funds. Consider and disclose to clients insolvency factors when placing the coverage.
Finally, it's smart to include coverage for referral services, so if a client you've directed to another firm has a problem with that company, exposure from the referral will be covered under your
E&O policy.
2 Crossing state lines
While your E&O policy typically provides nationwide coverage, insurance agents and brokers can become vulnerable to E&O claims when expanding their service territory, particularly across state lines. It's paramount during geographic expansion that agency employees possess adequate training, education and licensing.
All insurance is regulated at the state level, with laws and obligations sometimes in dramatic variance, even for states bordering each other. If you're placing business in nonadmitted markets, you'll have another layer of compliance to consider and should check each policy for unique endorsements and requirements.
It's also critical to have a good idea of the standards of care expected of an agent and broker in the states in which you conduct business. In E&O litigation, some jurisdictions hold agents and brokers to a higher standard of care, while others view the agency as simply an order taker. Further impacting standard of care issues, some states make a distinction between agent and broker responsibilities, while in others the respective roles are blurred. Bottom line: It's easy to get tangled up in state regulations if you don't have a firm fix on the laws and regulations that apply when crossing state lines. Become educated, solicit good legal advice and conduct periodic audits to insure that appropriate processes are in place to minimize exposure.
3 Gaps left by layoffs
When push comes to shove, whom do you cut when downsizing to maintain and grow revenue: the agent who placed the policy, or the administrative person who handles it after it's placed and serves as a "second set of eyes," making certain everything was done correctly?
Even in the best of times, who doesn't favor the sales person who directly impacts the bottom line over the customer service rep or lower-level, back-office administrative staff whose revenue contributions are less direct? Yet when it comes to preventing an E&O claim, the mundane administrative details are absolutely critical and can cost the agency millions in potential claims if not properly managed. Running the gamut, these tasks include renewal notices, submitting claims prior to renewal, documenting refusals of coverage and declinations of higher limits, making policy changes, double-checking information and values, adding a particular insured to the policy, and issuing accurate certificates of insurance.
As the economy forces broker organizations to run leaner and meaner, the two questions any agency needs to be asking itself are these: Are we letting go of too many employees with the skill sets needed to adequately complete the job? Have our customers come to expect a level of service that we promise but can no longer deliver?
It's important to recognize that if your firm has a certain practice--even one that's voluntary and not required under state standard of care provisions--you can create a liability if you fail to provide the service to customers without sufficient warning.
For example, if you suddenly ceased or delayed sending out timely renewal notices to customers after doing so in prior years, and a customer's policy is cancelled because they didn't receive the expected notice, the broker could be found liable for not providing what the customer had come to expect.
During layoffs, firms should make certain that particular skill sets aren't lost and that best practices are maintained. The agency must develop a plan and keep processes in place for maintaining high-quality service so that nothing falls through the cracks.
4 Marketing hyperbole
Like many agencies during tough times, you've probably beefed up your Web site and marketing materials. But have you gone overboard? Misrepresentation and even negligent oversell are all grounds for an E&O claim.
One of the things that we study very carefully as underwriters is what an insurance agency states on its Web site. In an attempt to attract visitors, showcase expertise and sell more products and services, what agencies say they can do on their Web sites and what they actually can deliver are often worlds apart.
For example, one brokerage claimed expertise in trade credit insurance when a deeper look showed they had just one transaction in that area the previous year. If one of their insured had filed a claim based on poor advice concerning trade credit insurance, even if the claim had little merit, the agency would have had difficulty defending itself because they had exaggerated their level of expertise.
Think long and hard about what you put on your Web site. It might come back to haunt you.
5 Hiring independent contractors
With the need to reduce overhead for their very survival, many agencies are hiring more independent contractors both seasonally and year-round. Today there is hardly a business function that is not being considered for outsourcing: sales, marketing, customer service, policy administration and billing, human resources, accounting and IT, to name just a few.
Yet even when you subcontract with another party to complete work on your behalf, you assume liability and exposure for their actions. Does your E&O policy pick up independent contractors? Not all do. If your policy does cover independent contractors, now is the time to double-check that the ones you are using have been added to the policy.
While hiring an independent contractor can be a cost-effective alternative to hiring an employee, it's important to recognize that you may not be able to exercise as much control over them as you would like. Therefore, minimize risk by regularly checking in with any independent contractors and reviewing their policies and best practice procedures.
A detailed contractor agreement, clearly laying out the respective obligations, will go a long way toward clarifying and resolving the situation in the event of a dispute. As added protection, the contract could also contain a requirement that the independent contractor maintain his or her own coverage and name the insurance agency as an additional insured.
6 Mergers & acquisitions or clustering
Spurred by the economy, increasingly we are seeing more mergers and acquisitions. More agencies are also becoming involved in "clustering" or aggregating arrangements, pooling resources with other agencies to gain advantages in premium volume, distribution reach and cost-savings typically afforded to larger concerns.
When companies merge or one acquires the other, the situation can be fraught with potential E&O exposures down the road. Do the companies have different ways of automating? Do they follow similar best practices? Are they on the same page when it comes to renewal procedures? Are their underwriters as proficient in areas as the company being acquired? Are all the licensing requirements in place? The list goes on and on.
Many of these deals are set up so that the acquiring firm purchases the assets and not the liabilities of the other company. By doing so, the acquiring agency believes it is immune from lawsuits that could be directed against the other firm.
Yet this is not always the case. If you unknowingly acquire a flawed policy and renew it as it expires, if a later claim comes in on that policy it becomes your claim.
When acquiring another agency, it's important to recognize that while you might not have acquired the firm's financial liabilities, you have acquired its business practices. And if some of those practices were shoddy, you may inherit claims under the new regime because you are inadvertently continuing wrongful practices. 
So it's imperative before entering into any acquisition or clustering arrangement that you understand the full ramifications on your E&O policy. Will your agency be protected as part of the aggregated group or will each agency in the pool maintain its own E&O policy? What's in place to protect you from another agency's E&O liability?
