The professional liability (PL) market in Florida, like most ofthe United States, remains soft for many industries. Generally,agents and brokers seeking this coverage on behalf of theircustomers are finding low rates, plenty of capacity, and anincreasing number of insurance carriers willing to write it. Also,most agents and brokers are able to offer their customers proposalswith higher limits at more competitive pricing and with broadercoverage features than previously available.

Architects, engineers, lawyers, consultants, and otherprofessionals are finding their PL policies, also called Errors& Omissions (E&O) coverage, at very affordable rates. Insome cases, the nature of what would be considered covered —protection against loss from a claim of alleged negligent acts,errors or omissions in the performance of professional services —has expanded. For example, some Miscellaneous PL policy forms haveadded privacy cover and other features that in 2008-2009 would havebeen obtainable only through a stand-alone, specialty policy formost industries.

However, this capacity and largesse of terms does not apply toall risks or all industries. Two industries where capacity istighter and terms are more restrictive are financial services andreal estate; both were hit hard by the subprime mortgage crisis andmarket crash in 2008-2009.

In Florida, the housing and financial trends are particularlysignificant. According to the Mortgage Bankers Association, Floridahad the highest number of bank failures in the first quarter of2010 and was second only to California in home foreclosures. Thestate also ranks in the top five in mortgage fraud. And Floridianswell remember that when Bernie Madoff turned his wealth managementbusiness into a massive Ponzi scheme that defrauded thousands ofinvestors, Palm Beach was one of the hardest hit areas.

These facts, combined with the expected impact of the Dodd-FrankFinancial Reform Bill, present significant challenges — as well asopportunities — for Florida agents and brokers. The PL market as itrelates to real estate and financial services industries willbecome even more complex. However, if agents partner with someonewho has expertise specific to these industries, then they canposition themselves to serve a growing need for E&Ocoverage.

Claims, Rate Increases, and ExclusionsAbound

Following the 2008-2009 market crash, there was a sharp increasein arbitration claims by investors, which subsequently pushed up PLrates and tightened capacity. In many cases, PL insurance isexpected to rise 20 percent or more over the next 24 months. PLpremiums at independent broker-dealers during the most recent 12months range from about $2,400 to $4,200 a year per registeredrepresentative, a significant cost for firms with hundreds ofrepresentatives.

Also, these policies may be written with strict exclusionarylanguage, including a “troubled investments” exclusion, whichoutlines an exclusion for actual or alleged transactions withpeople and companies like Bernie Madoff, LandAmerica FinancialGroup, Stanford Financial Group, Edward Okun, Medical CapitalHoldings, Provident Royalties, LLC and others. In order to avoidthe attachment of such an exclusion, insurance companies arerequiring a signed statement that brokers and advisers did not dobusiness with named entities.

Additional exclusions may involve commodities, commodity futuresor option contracts except covered call options, real estateinvestment trusts, hedge funds, direct private placements,leveraged ETFs and auction rated securities, and securities issuedthat are unable to meet the minimum capitalization and otherrequirements for listing and maintenance on the NASDAQ SmallCapMarket.

Growing Opportunity for Florida Agents in NewRIAs

Another significant niche market is the increasing number ofbrokers and advisers who are abandoning their roles at bank trustdepartments, wirehouses, and other traditional financial servicescompanies. These entrepreneurs are creating “breakaway” teams,establishing their own registered investment advisers (RIAs) firms,or joining other independent advisory firms. Fidelity Investmentsreported recently that 95 individual brokers or teams with nearly$7 billion in assets either set up their own RIAs, joined existingRIAs, or affiliated with independent broker-dealers that clearthrough the company.

As Daniel Rojas, an agent at the Miami agency Kahn-Carlin pointsout, this trend also opens up new business opportunities. “Withmore financial services professionals splitting from their oldinstitutions and starting their own firms, they will needprofessional liability coverage,” he said. “While it can be toughfor insurance agents to find new business in today's economicenvironment, tough times also bring new opportunities, andfinancial professionals are one of them.”

PL coverage may become even more important in this market nichebecause there is a growing movement to scrutinize, analyze, andmore heavily regulate these firms and their personnel.

Impact of the Financial Reform Bill

The real game changer in this arena is the Dodd-Frank FinancialReform Bill, which rewrites the fiduciary standard and constitutesthe most sweeping financial reform package since the 1930s. It isanticipated that the biggest impact of the bill will be felt bybroker-dealers, investment advisers, and RIAs. The following areamong the bill's features that promise to affect PL coverage:

J It calls for study of additional information that should bemade publicly available regarding a disciplinary disclosure systemfor both advisers and brokers.

J It puts larger broker-dealers in a group of non-bank financialcompanies that will be supervised, a provision that will have atrickle-down effect on independent broker-dealers and RIAs of allsizes.

J It calls for additional studies of hybrid capital instrumentsand whether such instruments should be excluded as components ofTier I capital for banking institutions and holding companies.

In addition to this bill, a new investment adviser publicdisclosure database creates an online system that tracks thedisciplinary records of registered representatives (accountexecutives at a broker-dealer) and includes allegations bycustomers against named investment advisers. Also, in July the SECapproved a rule change from FINRA, the largest independentsecurities regulator in the U.S. It increases the time period forpublic, online disclosure of unproven complaints, thus evening theplaying field for the public availability of this information.

In short, a high threshold of compliance and transparency on thepart of broker-dealers and advisers in Florida is on the horizon.When investors go online to check out the history of theirinvestment adviser they will be able to see allegations, even ifthey are old and unproven.

Broker-dealers, independent advisers and RIAs who were notbuying E&O insurance are increasingly required to buy it now —and they need the help of their insurance agents. It is importantthat agents sit down with their clients, gather all the necessaryinformation, and make sure the correct applications are filled outcompletely.

However, when it comes to placing insurance, agents may findthat they need help. Markets are very limited and this is a toughline of business for agents to write unless they have experienceand are connected to the right partners — wholesalers, MGAs orcarriers — who can get these deals done.

Real Estate and Mortgages

The subprime fallout and increase in foreclosures also has had asignificant impact on real estate finance professionals, mostnotably mortgage brokers and mortgage bankers.

“Financial service providers have taken a triple hit,” saidRojas of Kahn-Carlin. “First was the housing market collapse, whichresulted in no business for the mortgage industry. Then came claimsfrom clients who said they were misled by their mortgage provider.Last, this period of very little new mortgage creation.”

While PL premiums in this industry have leveled off after aspike in 2008-2009, exclusionary language has increased in thesepolicies and most business is being written through Londonmarkets.

Mortgage bankers are facing new challenges with the Real EstateSettlement Procedures Act (RESPA). Enacted by the federalgovernment after the subprime crisis, RESPA establishes newcriteria for mortgage bankers originating home loans and forcesmore transparency in their mortgage origination activities.

Looking ahead, it is expected that U.S. carriers will beginwriting more PL coverage for mortgage bankers, providing additionalopportunities for Florida insurance agents and brokers in thisarea. Those agents who can learn the market and find the rightpartners to help negotiate terms and conditions will see furtheropportunities and expanding capacity in years to come.

Mortgage brokers who walked away from the industry after thesubprime experience are starting to return, and these professionalsare facing different challenges than mortgage bankers. By January2011 the federal government will mandate that all mortgage brokersbe licensed and bonded, a requirement that has already been adoptedby Florida and some other states. Obtaining a surety bond willrequire scrutiny of the mortgage broker's financials and if thefinancials are not strong, some form of collateral will berequired.

Other real estate professionals such as appraisers, homeinspectors and realtors can find ample markets for E&O coverageas long they stick to one line of business. Those who performmultiple roles — especially those who also own or have ownedproperty, or who delved into development — will find somewhatlimited capacity, higher rates and additional exclusions.

Like the financial services industry, the real estate industryis emerging from very difficult times, and markets for PL insuranceare harder than other industries.However, for Florida insuranceagents and brokers who take the time to learn about them and findthe right partners, these markets can be an excellent source ofgrowth in the years ahead.

Tara Harvey Bramwell is senior vice presidentand Michele Morrison is vice president ofunderwriting for Venture Insurance Programs' Prowriters businessunit, which specializes in management and professional liabilityproducts through agents and brokers. www.ventureprograms.com.