Agency E&O: Six experts speak out

AAB: Is there any indication that the current economic climate, the subprime mortgage crisis and the increase in shareholder lawsuits are having an impact on the number of agent E&O lawsuits or exposures?

Sargent, Mercator: We have not seen any broad uptick in insurance agent claims from the current economic climate, the subprime mortgage crisis or shareholder lawsuits, although it may be too early to see any significant activity. We have seen claims from hurricanes and other natural disasters, as you would expect. And insurance agent exposure to natural disasters, particularly hurricanes, is of concern to underwriters.

Price, Burns & Wilcox: In the past five years we've seen an increase in claims, primarily because policies are getting more complex and a lot of the agents are not aware of the coverages, terms and conditions built into their policies. For example, agents that write professional liability for Internet exposures may not be covered for all exposures. Or if an insured is covered for a claim, it may exceed policy limits, and then the agent is liable. New technologies are a double-edged sword; while agency management systems help agencies become more accurate and organized, Web advertising can open the door to claims. If you're making a claim of coverage to a potential customer, you'd better make sure you deliver and that coverage is there.

AAB: In your experience, what are the most common agent E&O claims that you are seeing today, and have typical claims changed in recent years (e.g., more related to misuse of technology, etc.)?

Duffett, Insight Insurance Services: The most common E&O claims continue to arise from either a gap between customer expectations and the coverage purchased, or the failure of the agency to place coverage. Agency management software can help mitigate the possibility of these claims, particularly the failure to place coverage, if properly used. Mistakes still happen when agencies aren't diligent about entering information or aren't meticulous with diary dates and premium reconciliations. E-mail communication can be helpful with both clients and insurers because it provides a form of written documentation of discussions, requests and quotes.

AAB: Are there any particular risks that are endemic to the soft market?

Price, Burns & Wilcox: Probably the biggest E&O issue is the pressure on pricing. To get the right rate to sell an account, the agent may reduce or eliminate coverage from an insured's insurance program. A secondary issue may be where a risk changes from occupied to vacant and the agent does not advise the insured to make corrections to the coverage as needed.

AAB: What are you seeing in the way of pricing for this coverage?

Blechman, Lee & Mason:Pricing on agent E&O coverage is purely market driven; we're seeing very little underwriting going on out there with some of the competition we're seeing. For example, in California, we wrote policies at $2,000 and $4,000 and lost money; so we sure can't write broader coverage for $1,500, yet companies are doing that. We truly are underwriters, not brokers, and we can't figure out a way to make money at that price.

AAB: What do agents need to know when purchasing E&O coverage regarding policy forms, terms and conditions?

DeGirolano Rockwood : E&O policies are written on a claims made basis, making it extremely important to keep coverage continuously in place. Having a lapse in coverage of even one day can cause you to lose coverage for all of your prior business written, regardless if you had coverage in place at the time.

Sally, Swiss Re: The old adage "you get what you pay for" can be true when purchasing E&O coverage. Defense costs within the limit of liability versus defense costs outside the limit is an important evaluation. Review the definition of professional services, definition of insured, and also the exclusions, as these can vary significantly. Does the carrier have a well-established reputation for underwriting and handling claims for insurance agents?

Sargent, Mercator: The market is soft, so make an effort to shop around to get the best deal. A broker specializing in placing E&O insurance can be helpful in getting an improved price/coverage combination.

Despite the soft market, underwriting has not been abandoned. Claims, particularly a pattern showing less-than-perfect internal procedures, can have a significant impact on pricing. Loss prevention is still important to underwriters.

Hope does not make a bad situation disappear; resist the temptation to not report an incident. In fact, it is better to report a situation sooner than later.

Pay close attention to coverage, not just price. This is the time to get broader E&O coverage for little or no premium increase. And limits are important: the standard $1 million E&O limit that many smaller agents buy is probably not adequate in today's environment.

Price, Burns & Wilcox: If you can, buy adequate limits. Remember, most insurance agent E&O policies are claims made with defense inside the limit. Make sure adequate tail coverage is available. The policy should cover E&O claims from all types of insurance operations. If you sell some specialty classes of insurance, they need to be covered. Some policies are restricted. If you have a large deductible, make sure you have an annual aggregate of deductibles. Be aware of the strength and reputation of your carrier — and buy insolvency of carrier coverage if you can.

Sidebar:
According to MarketStance, 403,165 insurance agencies and brokerages paid nearly $236.7 million for E&O coverage from 2003 to 2007, with premium for all categories running to more than $9.6 billion. More than 80 percent of these buyers were one-person services with no employees, and nearly 20 percent more were small firms with fewer than 50 employees.

Here are our experts' top 10 tips for E&O prevention for agents:

1. "Document, document, document. A good agent will document all communications between the agent, client and the carrier." – David Price, Burns
& Wilcox

2. "Have an established process for every step in handling an account and ensure the process is followed the same way every time." – Sabrena Sally, Swiss Re

3. "Despite the soft market and the lower E&O premiums that come with it, don't take your eye off the ball when it comes to prevention and employee education. The best insurance agent E&O claim is the one that never happens." – Robert T. Sargent, Mercator Risk Services

4. "If placing business in a nonadmitted market, be absolutely sure they're in compliance with all regulations. Remember, nonadmitted forms are not standard and must be checked for unique exclusions and conditions." – Sabrena Sally, Swiss Re

5. "Perform periodic audits of your policies and procedures to ensure that coverage is being properly placed and procedures followed. Having a senior, experienced agent or management review each bound account is also helpful in catching any improper placement of coverage." – Tabitha DeGirolano, Rockwood Insurance

6. "Require signoffs for any insured when they are declining or limiting the coverage they are purchasing." – Tabitha DeGirolano, Rockwood

7. "Read your coverage language carefully, as each form is slightly unique. Some are poorly written, others are miscellaneous E&O forms modified for agents, some with as many as 20 or 30 exclusions. They need to be read carefully and understood." – Linda Blechman, Lee & Mason

8. "Don't write a risk you don't understand; seek professional advice for coverages needed and available coverage." – David Price, Burns & Wilcox

9. "Maintain communication with the insured. Make sure exposures have not changed or values increased. Don't assume the insured will tell you." – David Price, Burns & Wilcox

10. "Purchase coverage in the same way you advice your clients to purchase. Take a good look at the full scope of the coverage in comparison to the premium. Just like other lines of coverage, some lower-priced E&O quotes aren't a good value." – Michelle Duffett, Insight Insurance Services