During the hard market of 2001-2004, insurance agencies saw errors and omissions claims increase by roughly 25%. One theory is that as carriers tightened coverage terms and conditions or completely withdrew from markets, there was a dramatic increase in the number of claims settlements that did not meet policyholder expectations. When that happens, it's common for those policyholders to sue their insurance agents. Now, all signs point to a softening insurance market, and policyholders will no doubt welcome the higher limits, broader coverages and lower premiums. We are emerging from a relatively turbulent time with respect to agent E&O claims; actually, we've seen a decrease in such claims in the last two years. While that's great news, it's no reason to become complacent.
In spite of the overall decrease in claims, certain types are increasing, and they have the potential for lofty settlements. Consider the number of certificates of insurance that a typical insurance agency issues in a week. A certificate is simply a snapshot of coverage, and you might think its claims potential would be low, but in fact the opposite is true. In some jurisdictions, as many as 12% of all agent E&O claims stem from the issuance of certificates.
Agents have grown so concerned that two recent teleconferences sponsored by Swiss Re on the pitfalls of certificates drew more than 700 agencies. Causes of claims involving certificates range from listing policies on a certificate that are not in force to failing to make sure that any people identified as additional insureds on a certificate have indeed been added by endorsement to the corresponding policy. Depending on the type of loss and coverage involved, the value of a claim can range from a few thousand dollars to millions.
By practicing some basic loss prevention, an agency can help protect itself from E&O claims involving certificates. Here are some tips:
o Be sure you have authority to issue certificates on behalf of a carrier–which is not always the case. For example, it's not unusual for agencies to have no authority to issue certificates on policies obtained from excess and surplus lines markets.
o Be sure the certificate reflects the coverage exactly as it was issued. Do not add special language for provisions, such as for additional insureds or waivers of subrogation, that are not provided for in the policy.
o Be sure to use the most current version of the certificate form, taking care to issue both the front and back of the certificate.
o Finally, send copies of all issued certificates to the appropriate carriers.
E&S headaches
E&S placements are another common source of agent E&O claims. While a few large agencies may have direct relationships with E&S carriers, most access the E&S market through wholesale insurance brokers. Introducing a third party to a transaction increases the risk of an E&O claim.
The E&S market serves the coverage needs of unique risks and those with claims history not acceptable to admitted carriers. Unique risks result in unique coverage terms, and claims problems often result from coverage restrictions. In regard to E&S placements, the most common E&O allegation is that the policy did not provide the coverage a policyholder expected. Among other reasons, that's because nonadmitted carriers have limited regulatory restrictions on policy language. Their policies almost always contain exclusions, warranties, minimum earned premiums and short-fuse cancellation provisions not normally found in admitted carriers' policies.
Claims also often occur because of alleged failure to place coverage, as agents rarely have the authority to bind coverage or to issue certificates of insurance on behalf of E&S insurers. In addition, each state has regulations specifically addressing the handling of placements with nonadmitted carriers. In some jurisdictions, even an error not relevant to the coverage can result in strict liability on the part of the agent, sometimes even personal liability.
Know your E&S broker
Consider this scenario: You're an agent placing coverage for a manufacturer of child car seats. How can you be sure you're adequately protected from an E&O claim? While nothing guarantees protection, creating a list of loss-prevention steps and following them when using nonadmitted markets can greatly reduce your risk.
First, know your broker. There are many reputable wholesale brokers who can provide expertise and market access to your agency. An agency should know its wholesale broker as well as it knows its own contracted carriers. Spending a few hours conducting due diligence could prevent the loss of countless hours and dollars responding to an E&O claim. Ask the following questions:
1) How long has the wholesale broker been in business?
2) What experience does it have placing the type of coverage you desire?
3) Does the state insurance department show any record of unresolved complaints against the wholesaler?
Ask your competitors about their experiences with different brokers. Also, ask for and maintain a copy of your broker's current certificate of E&O coverage.
It's also important to understand that placing coverage through a wholesale broker does not relieve an agency of liability that could result from a carrier's insolvency. Agencies must manage the exposure associated with the financial condition of the broker's carriers, just as they do with their admitted carriers. This may include advising customers in writing of the current financial condition of the carrier being used.
To help mitigate the risk that the customer does not understand the terms of coverage, present the quote to the customer exactly as it is received from the wholesale broker. Discuss the major terms and conditions, and obtain written clarification from the wholesale broker of any terms that are unclear.
To ensure that coverage was issued as it was requested, carefully proof all binders, policies and endorsements received from the broker before delivering them to the policyholder. Be sure to obtain any signed releases requested by the carrier.
Finally, be aware of and comply with all regulations pertaining to the placement of business with nonadmitted carriers. Regulations not only vary by jurisdiction but can and do change with differing legislatures. It's vital to continually monitor those changes and ensure consistent compliance to avoid small non-compliance errors that could expose an agency to large damages.
Choose wisely
The insurance market cycles affect the availability of insurance agents E&O coverage, just as it does other lines. From 2000 to 2004, more than one carrier exited the agents E&O market. Those carriers that had the fortitude to remain increased rates, reduced limits and restricted terms. The lower rates and broader coverages now reported across most casualty lines of coverage apply to agents E&O insurance. Given this, an agency might be tempted to replace its E&O carrier.
Agencies are in business to make a profit, and there's no denying that the price of E&O coverage is important to the balance sheet. The balance sheet, however, must also be protected from the large unpredictable fluctuations that can result from an uncovered E&O claim. A low premium quote may look attractive; however, it's what lies behind that premium that's of vital interest to the agency. You wouldn't buy a new car without researching its safety, reliability ratings and performance. You'd also compare the features of competing models. Taking any less care when purchasing the coverage that protects one's livelihood is pure folly.
An E&O carrier's financial strength affects its ability to pay the costs of any defense and loss payment promised by the coverage terms. The most common indicator of an insurer's financial strength is its A.M. Best's rating. In the soft market, carriers with A+ A.M. Best's ratings are commonly available. To settle for anything less may be a risk not worth the savings.
If stability of coverage is important to your agency–and it should be–you should take a few minutes to research a carrier's history. Consider these questions:
o How long has the carrier been in the agency E&O market?
o If the carrier is new to it, does it have a pattern of long-term commitment in other professional lines, or does it have a record of entering and withdrawing from those markets?
To borrow a phrase from the financial services industry, "Past behavior is no guarantee of future performance." It stands to reason, however, that a carrier with a history of providing agency E&O coverage or with a presence in other professional liability lines is more likely to be a long-term provider of coverage. Since agents E&O insurance is written on a claims-made basis, the continuity of coverage provided by a long-term player is important.
Consider what you'd want from your E&O carrier if your agency were sued. You'd want qualified claims handlers experienced in agency E&O, who could respond to a claim regardless of jurisdiction. You'd expect the claim to be handled in a timely, fair manner. To help determine how a carrier will perform when a claim occurs, there are a few questions you can ask:
o What is the carrier's reputation for paying claims?
o Are the claims handled in-house or outsourced to a third party?
o Are the claims handlers attorneys?
o What's their experience with insurance agency E&O?
o Does the insurer have established relationships with panel counsel in the states in which you are licensed?
The answers will give you a sense of the quality of claim service to expect. There are carriers with in-house staffs of attorneys experienced in and dedicated to handling agency E&O claims, supported by panel counsel relationships across the country with decades of experience defending claims against agencies. There's no need to settle for less.
Coverage features
Coverage features can and do vary considerably from carrier to carrier. The heart of the agency E&O policy is the insuring agreement. Regardless of the terminology used (e.g., wrongful acts, negligent acts, errors or omissions) this section is the starting point for determining if competing premium quotes are for comparable coverage.
Equally important are the policy definitions. They can quickly negate what the insuring agreement provides. Pay close attention to how these two sections coordinate. In the soft market, coverage may be broad, applying not only to an insured's wrongful acts as an insurance agent, MGA or broker but also extending to an agent's activities as a notary public, insurance consultant or insurance teacher, as well as to regulatory investigations. A few policies even provide an amount to cover extra expenses incurred to process the claims of customers affected by a catastrophe and to respond to subpoenas. On the opposite end of the spectrum are policies that limit coverage to one's activities as an insurance agent, broker and consultant, with the only additional coverage being for activities as a notary public. The variations between the two extremes can seem endless.
Defending an agency E&O claim can be expensive. The cost to defend a claim through summary judgment now averages $10,000. If the claim can't be settled without going to trial, defense costs can easily reach six and even seven figures, depending on the complications of the claim, the jurisdiction and the attitude of the plaintiff. Will defense costs erode the E&O limit of liability, or are those costs paid in addition to the limit? You can expect to see a substantial difference in premium between the two options. The size of the deductible, types of coverages written in the agency and the value of your peace of mind should all be considered when choosing how defense costs are addressed.
Mind those exclusions!
A comprehensive analysis of exclusions in agency E&O policies is a must when comparing coverage forms. Standard exclusions such as for fluctuations in value, ERISA actions, intentional acts and misappropriation of funds are fairly common. Beyond those, you'll find great variation among carriers. Forms range from those that completely exclude claims arising from carrier insolvency to others that offer insolvency coverage for placements with carriers rated B+ or better and to those carriers scheduled on the policy. Exclusions governing claims arising from contractual liability, viatical and structured settlement placements, insured vs. insured disputes, mold and undisclosed compensation vary widely among carriers. Only by comparing exclusions line by line and reviewing policy definitions can you begin to understand the scope of competing policy forms.
Many major E&O carriers don't restrict coverage based on where the claim occurred or lawsuit is brought. Some not only limit the jurisdictions in which suit may be brought, but also limit the duty to defend based on the jurisdiction of the claim. If your agency has no customers with international exposures, this may not be a concern. But if your customers include large commercial risks, it may be important to have agency E&O coverage that will respond to a suit brought anywhere in the world.
M&A madness
Given the dizzying pace of agency mergers and acquisitions, it pays to know in advance how your E&O carrier will respond to one. Is there a grace period during which it will provide automatic coverage for a newly acquired entity? If so, how long is the period? If your agency is the one being acquired, what extended reporting period options does the carrier offer?
Extended reporting periods range from as short as one year to as long as 10. Pricing most often is explained within the policy form; however, at least one carrier leaves the pricing of extended reporting periods to be determined at the time an ERP is offered. The importance of extended reporting period options varies with an agency's merger and acquisition activity level and its perpetuation plans. Be sure your policy best fits the needs of your agency.
A possible conflict
Sometimes agencies consider buying E&O insurance from a carrier with which they also are appointed. In that case, there are additional considerations.
It's not uncommon for E&O carriers to try to resolve agent E&O claims by persuading the affected carrier that a reformation of its policy is in everyone's best interest. This can result in greatly reduced legal fees and even elimination of damages awarded against the agency. Are you confident that a carrier that not only provides your E&O insurance but also has issued the policy involved in an E&O claim against you can appropriately manage the conflict of interest?
In recent years, it has become more common for carriers to sue their agents, alleging that they were damaged by the agents' wrongful acts, errors or omissions. What happens if a carrier suing an agency for E&O is also the one defending it? It's not impossible for such a carrier to successfully address the conflict of interest, but it can be challenging. The question becomes, How comfortable is the agency with the conflict in the first place?
Hard market, soft market–each has its own opportunities and challenges. By taking a thoughtful and educated approach to your E&O coverage, you can avoid the pitfalls brought on by the soft market and spend more time capitalizing on market opportunities.
(This article is intended for informational purposes and not as legal or other professional advice. Please procure the appropriate legal or other professional advice and services to address your individual circumstances.) Sabrena Sally is a senior vice president of Westport Insurance Corp., a subsidiary of Swiss Re. She is also business leader of Westport's professional liability area. Prior to accepting that position, she was the underwriting manager of the company's agents E&O unit. Ms. Sally, who joined Swiss Re in 1987, has more than 25 years of insurance industry experience. Her career with Swiss Re includes positions as underwriting manager of the accountants professional liability, architects and engineers professional liability and media/electronic E&O liability departments. Ms. Sally resides in Columbus, Ohio, from where she manages an 18-member team of professional liability underwriters. She earned the CPCU designation in 1995.

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