Trends in Litigation Spur Client Interest in D&O and EPLI

OVER THE last decade, Vanner Insurance Agency has grown steadily as a result of specialization. The agency's principals–Ralph Vanner Sr., Ralph Vanner Jr., Thomas Vanner, Bradley Hall and William Quinn–sell perhaps 75% of the agency's business, and each specializes in arranging coverage for a particular niche, such as construction, property leasing and social services.

Recently, however, we've also started to grow by focusing on certain lines of coverage–specifically, directors and officers liability insurance and employment practices liability insurance. Getting into these lines took some effort, since the agency previously had not placed much emphasis on any form of professional liability insurance. But we've been well rewarded, not only with increased business but also improved client relationships and a lower E&O exposure.

We started this initiative about a year ago, after comparing our product portfolio to the coverages our commercial-lines clients were talking about. We quickly realized we needed to put more emphasis on D&O and EPLI. It was not surprising that businesses were interested in these coverages. Erie and Niagara counties–the heart of our marketing area–are among the most litigious in the country. As business owners drive to work each day, they see billboard after billboard advertising the services of plaintiff attorneys.

While we were eager to sell more D&O and EPLI coverage, we realized that we couldn't expect all our producers to become experts in these products. As previously mentioned, our principals and some other producers already were specialists in their own areas, and we wanted them to continue to focus tightly on their own niches.

Fortunately, we had one producer who had quite a bit of experience with D&O and EPLI, and he agreed to become the “point person” for the other producers, our marketing people and our clients. So while all the producers have a basic understanding of these coverages, they consult with this producer regarding product particulars. This producer also assists with presentations and plays a role in preparing submissions.

Of course, we also needed good professional liability markets. While we would love to approach five or six different insurers for quotes, we don't have anyone on staff who can take the time to dissect a half-dozen quotes and determine which is best for a particular client. Therefore, while we place some business directly with such carriers as Chubb and Hartford, we also rely on a wholesaler–Russell Bond & Co., which, like us, is located in the Buffalo area–to do the lion's share of placements for us.

As we made plans, we did not go so far as to set formal production goals. I think results are difficult to project when an agency first starts marketing a new product in earnest. So rather than forecast a certain number of policies we'd sell or pick a volume target to hit, our initial goal was simply to ensure that we discussed these coverages with all clients and prospects. As things turned out, we wrote about $200,000 (volume) in D&O, EPLI and management liability business in our first year. While that included some large premiums, many were in $3,000 to $10,000 range. Although premiums, in some instances, were almost nominal, they were for coverages that needed to be added.

There were other benefits as well. By increasing our involvement in D&O and EPLI, we became more versatile and improved our ability to serve midsize and larger accounts. We've also received referrals and spin-off business.

Our typical clients for D&O and EPLI are businesses with 25 to 100 employees. They have small boards of directors or ownership groups, e.g., two or three partners and no outside directors. It's easier to deal with a smaller group than with a 12-person board. Certainly, our closing ratio is much higher with smaller groups of decision-makers.

Such clients, in my 20 years of experience, have never been more concerned about their management liability exposures. Employment practic- es liability, in particular, really rings a bell with these businesses. When I've been on new-business calls, I've actually had business owners bring up the topic themselves. That never happened in the past. Ninety-percent of the policies we sell to these clients are management liability policies, which combine D&O with EPLI and sometimes add fiduciary liability as well. Essentially, you get two coverages for the price of one, or three for the price of two.

D&O and EPLI are now integral parts of every renewal proposal that goes out of the agency. In the past, we'd insert a page in the proposals that outlined management liability exposures and invited clients to contact us if they wished to discuss the issue. Now we go a step further and include premium indications for management liability insurance. With the market softening, more of our clients are responding to such indications and asking us to develop actual quotes. If we can save a $50,000 account 12% to 15% on its standard P&C coverages, we often can add D&O and EPLI without increasing the total cost of their program. Meanwhile, we're maintaining our margins and reducing our E&O exposure.

Prospecting
At the beginning of the year, we target anywhere from 12 to 20 large accounts that we feel that it would take us least two years to obtain. During this period, we use social interaction and introductions from CPAs or other centers of influence to begin building relationships. With these large accounts, we sometimes find there is a line of coverage that no one is addressing. All agents are happy to take care of the easy part of such an account: the property, general liability and workers comp. But ironically, when we get an opportunity to talk with a large account, we sometimes find no one really has spent time on the D&O or EPLI.

One way we are just starting to market ourselves to these large accounts is by conducting D&O and EPLI seminars for them. These are luncheon seminars at which a professional liability underwriter from our wholesaler discusses exposures and explains the nuances of coverage.

We usually approach small accounts, on the other hand, by direct mail. Typically, we work with prospect lists our carriers give us. Several provide us with lists for the agency's specialties, but they and other carriers also send us lists of other businesses they've unsuccessfully attempted to quote. One of our younger producers follows up on these leads. By soliciting something other than the standard P&C coverages, whether by addressing a prospect's management liability or workers compensation exposures, he may gain a foothold in the account. While the carrier that gave us the lead may not write D&O or workers comp, it still benefits if we eventually obtain the whole account.

With our wholesaler's help, we prepared a pamphlet that discusses management liability issues. We distribute in several ways, including via e-mail to our current clients. At the top of their concerns are claims arising from discrimination, wrongful termination and sexual harassment. I think what really catches the eye today is that just the defense costs associated with such claims can run into six figures. For $5,000 a year, we can take care of that risk.

Our producers use checklists to gather information for D&O and EPLI submissions. Among other things we need are financial statements or at least basic financial data, resumes of the owners and the number of employees. We also need to know whether a prospect has an employee manual, as well as formal procedures for handling employment practices complaints. Whether the business has a full-time human-resources manager, or at least someone who has been assigned such responsibilities, is another important underwriting consideration. We also need information about any prior litigation–including Equal Employment Opportunity Commission proceedings and labor litigation–in which directors, officers or employees have been involved. Carriers also want information about any prior or planned layoffs or staff reductions.

Insurers might not offer quotes to businesses that have not taken basic steps to address their management liability exposures. For instance, businesses with fewer than 25 employees may not have even thought about spending the time and money to develop formal policies and procedures for handling harassment complaints. While we certainly don't offer legal advice, we can help such prospects craft procedures they can take to their attorneys for review. That service puts us in great shape to write the coverage, once the account is ready to take to the market.

To sum things up, I'd say that now is a great time for any agency to become more involved in D&O, EPLI and management liability insurance. In the press, there continues to be a steady drumbeat of “nightmare” D&O and EPLI claims, fueling insureds' interest in and demand for these coverages. Meanwhile, rates for many insurance products have been coming down, making it possible to add these coverages to clients' portfolios while staying within their budgets. Certainly, these coverages have been a “win-win” for Vanner Insurance Agency and its clients.