Opportunities, Exposures Climb In MiscellaneousE&O Kenneth A. Schneider

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They are often sneered at as the pajamacrowd, but its no laughing matter. The decline of directmanufacturing jobs in our nation, concomitant with the growth ofthe service sector, has spawned new classes of professionalconsultants.

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They consult in a diverse range of endeavors–everything fromhardware and software applications to manufacturing qualityassurance, from independent claims adjusters to mortgage brokers toanswering services. Each year, the list gets longer.

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Many of these people have successfully moved away from fullytenured corporate positions, with all liability coverages,including errors & omissions insurance, taken out by theemployer. As they move to the status of independent contractor andconsultant, these professionals are now responsible for theirinsurance coverages.

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These independent contractors, as well as many officialcorporate employees, may further maintain offices at home,conducting business by e-mail, cell phone or the Internet, or fromthe local coffee shop for that matter.

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This new layer of exposures or classes of potential liabilitypresents many new underwriting challenges.

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For example, are these independent consultants held to“different standards of care” than licensed professionals likeattorneys and accountants or those employed directly by acompany?

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Are all of their professional “services” covered in theirpolicies?

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How does working at home–or working virtually–change the natureand responsibility of third-party bodily injury exposures resultingfrom the professional services they render from their home?

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These questions detail just a few of the issues confrontinginsurers and MGAs who participate in the miscellaneous E&Omarket. Indeed, the rapidly changing nature of global business, thegrowth of high-tech interdependent commercial exposures, and theunprecedented potential security and liability exposures wrought byterrorism are irreversibly altering the exposure landscape ofmiscellaneous E&O insurance.

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The ledger sheet doesnt just include the new legion ofprofessionals, consultants and quasi-professionals who delivertheir services in a less “face-to-face” manner than ever beforefromboth real and virtual workplaces.

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Beyond these is an expanded scope of exposures emerging in lightof what we might describe as “the total reach of terrorism.” Thereare also exposures arising from government regulations and novelbusiness organizations. And finally, there are also greater E&Oexposures for insurance agents, themselves, as they take on theroles of risk manager and advisor to their clients.

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We wont go so far as Charles Dickens in calling this the best oftimes and the worst of times. It is obvious, however, that thepotential for underwriting growth in miscellaneous E&Oinsurance must be tempered by our need to fully assess theexposures, claims and profit potential of specificunderwriting.

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In many cases, the full risks are much greater than might firstseem apparent; in other cases, there is simply too littleunderwriting and loss history to sell policies willy-nilly.

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As we discuss several areas of importance and growth potentialgoing forward for miscellaneous E&O insurance, we urge theindependent agents and their servicing MGAs to be mindful of thisdouble-edged sword we now face, especially in light of the currenthard market across most all coverage areas.

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Consider, for example, the consequences of the terrorist attacksof 9/11 on the miscellaneous E&O segment. While the link maynot be immediately obvious, the impact of 9/11 is undeniable. Forexample, in a less certain world, what is the standard ofexpectation for the architects and engineers who design, plan andsupervise construction of office towers? Definitely, muchgreater.

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What about those responsible for security systems, sprinklersystems, or stairwells, elevators and related egress systems? Manyprofessionals are being held to a much greater standard of expectedperformance than ever before.

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Furthermore, even before that tragic day, we had alreadywitnessed a wider net being thrown out to snare E&O culpabilityas a result of federal, state and local regulation, by moredemanding end consumers, and by the creativity of far-reachinglitigators.

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These same professionals or quasi-professionals are alsopracticing in a global commercial environment where they may be“doing business” in jurisdictions they were not even aware of, oramong interlocking business entities.

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Handle a small project for a firm in your hometown? Its parentcompany may be in Switzerland.

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Design an assembly line as an independent constructor for asmaller manufacturing assembly in Indiana? The components may findtheir way into products on five continents, two or three companiesdownstream from the original customer.

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What about information we publish or opinions expressed on aprofessional Web page that are passed on beyond our control andthen acted upon?

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The concept of expanded liability is clearly seen in computerand technology consulting, which may comprise many components orsystems.

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The reliability and security of the computer and servernetworks, communications, electronic data exchanges, salesdatabases, private networks, e-commerce, and other systems thatsupport business-to-business or business-to-consumer commerce areall dependent on technology consultants.

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What if I devise a nightly back-up that sends the computercrashing, with a loss of important files or total shutdown of abusiness for several weeks?

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Increasing regulations and new forms of business organizationare also impacting and expanding E&O exposure, especially infields like health care with its mix of licensed, professional andadministrative gatekeepers, third-party payers, and the strong roleplayed by state and federal Medicaid and Medicare systems. Theresult is more shared, even unequal liability potential, aspatients “receive” care through several layers of entities, eachwith its own legal structure.

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Finally, we would like to awaken insurance agents to theirgreater chance of being drawn into an E&O claim. If an agentrecommends and writes a comprehensive portfolio of insurancecoverages, he or she assumes the position of an advisor or riskmanagement consultant. Should the insured suffer an E&O lossthat is denied, he or she may sue the agent for not providingcomprehensive enough E&O coverage.

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Agents must educate all professional service providers of theirrisk exposure and the need to continuously educate themselves withrespect to the ever-changing risk exposure landscape. Clientschoose whether to act on the agents recommendations. But failure toconsult, foresee and recommend a suitable policy may leave an agentin an indefensible and costly position.

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In summary, miscellaneous E&O insurance can be a tough classof business to write. But we believe it can be a great practicebuilder for agents in todays hard market and an excellentopportunity for MGAs who understand the inherent risks andexposures, as well as how to write and place these coverages andexclusions.

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If there were ever an area of insurance where “nothing is etchedin stone,” given the fluidity and creativity and fast-changingrelationships of modern global, high-tech commerce, this is theone. It will take specialized underwriting skills and resources toexploit the new coverage opportunities we just discussed.

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While high-tech captures our imagination, dont neglect the waysin which new modes of working and business are impacting older,“hard goods” industries like manufacturing or construction designcontracting. The boom in home construction and remodeling, forexample, is generating its own corps of quasi-professionals whomust understand not just hammer and nails, but also local andnational building codes, environmental issues, or materialssafety.

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Think far and look close by.

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Your existing clients for personal lines or property-casualtymight also be professionals who are not properly protected againstE&O exposures.

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Understand the exposures, work with a credible and experiencedMGA, and place them carefully in this modern era of interdependentglobal commerce.

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David J. Price (left) is executive vice president and chiefunderwriting officer for Burns & Wilcox Ltd. in Farmington,Mich. Kenneth A. Schneider is vice president and director ofproduct development for Burns & Wilcox Ltd.


Reproduced from National Underwriter Edition, May 19, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.


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