When life gives you lemons, independent agents and brokers errors & omissions coverage is a key contributor to the longevity of an agency—but only if the policy is covering the right exposures.
Independent agents and brokers errors & omissions coverage is a key contributor to the longevity of an agency—but only if the policy is covering the right exposures.
Here are five things you need to know about purchasing E&O coverage for your agency:
1) Why Do I Need E&O Insurance?
All professionals in every field should carry professional liability insurance, otherwise known as E&O coverage. Regardless of what your offerings may be, providing a service to your client can always leave you open to potential exposure.
There is an E&O policy specifically for insurance agents and brokers, which covers professional mistakes, failure to deliver promised insurance services and accusations of professional negligence.
If you're like most agency or brokerage owners, you may think that your firm wouldn't make these kinds of mistakes. In fact, that's the top reason agents cite for not carrying professional liability insurance. In reality, even the most professional agents make errors.
Other excuses agents frequently use for not purchasing coverage include:
- They were unaware of it.
- They intended to purchase it but didn't.
- They can't afford it.
In many cases, an unhappy customer who suffers a loss will seek any means of recovering that loss. Regardless of the size of the agency, a lawsuit can be problematic. But a small agency whose owners may have invested their life savings into their firm could go bankrupt with a single claim.
Let's say an insurance agency did not provide a flood insurance option for clients on the coast of Florida. Later, a storm comes along and the clients lose their house in the flood. When they call their agent to see if they are covered under their homeowners policy, they find they are not. That customer could sue the agency for negligence to secure the funds to rebuild their house.
Even if the agency isn't bankrupted, it could certainly suffer reputational damage and may find it much more challenging to attract new clients or retain current ones.
2) Who Exactly Does E&O Insurance Cover?
Not all policies are alike. When purchasing a policy, you'll want to make sure that it covers all of the services your agency provides.
For example, the definition of “insured" should be carefully reviewed prior to purchase. Determine whether predecessor organizations, new or old subsidiaries, independent contractors, and spouses or domestic partners are covered, as well as who is included under the definition of “insured" in the case of a death, incapacity or bankruptcy.
The definition of “professional services" can also vary. And since there are so many services an insurance agency can and will provide to their client, it is critical to identify and confirm coverage for all services the agency offers.
3) Are There Supplementary Coverages to Round Out My Protection?
There are many different coverages that can either be included on an E&O policy or available for supplemental purchase:
- Claim expenses outside the limit. Also known as defense outside the limit, this can be included within the policy or added as an endorsement. The key words are “claim expenses in addition to the limits of liability" or “claim expenses within the limits of liability." This coverage is usually added for an additional charge that ensures that your limits are not being lowered by claim expenses and are only being allocated to actual damages from a claim.
- Defense-only deductible. Also known as first-dollar defense, this can be added as an endorsement to most policies for an additional fee. This coverage determines whether the insured's deductible will apply to defense costs and damages or only to damages.
- Disciplinary proceedings. This coverage may be included within the policy or added as an endorsement. The amount of coverage the carrier will provide for disciplinary proceedings and any qualifiers would be listed in this section. A small limit is typically allotted to costs related to disciplinary proceedings by a regulatory body, disciplinary board or governmental agency. There is no coverage for costs related to criminal proceedings.
- Loss of earnings and expense reimbursement. This stipulates a specific amount that the insurer will reimburse the named insured for attending depositions, hearings or a trial in connection with a claim to which this policy applies.
- Pre-claim events. The carrier will pay a predetermined amount to cover any legal fees or expenses of counsel to assist the insured in responding to a subpoena or request.
- Extended reporting periods (ERP). Since most professional liability policies cover claims made and reported, policies that provide extended reporting periods will make a difference. This provides additional time to report an error that occurred while the policy was active. ERPs are purchased when a company closes or sells to another company.
4) What About Exclusions?
You should pay special attention to exclusions based on the type of insurance your agency sells and its ownership make-up. Exclusions to look for include:
- Claims made from commonly owned companies. Almost all carriers have this exclusion, which only makes a difference if the owner of the agency also owns, or used to own or work for, the other company.
- Requirements that a notary be physically present at notarization. If you are acting as a notary public, you should be aware of an exclusion within many policies that requires the notary to be physically present at the notarization. Even prior to the coronavirus pandemic, state laws and regulations were moving toward allowing remote notarization. Since then, many states have incorporated temporary approvals for using a remote notary. If you notarize items for your clients, it is very important to be aware of this exclusion.
- Claims arising due to insolvency, bankruptcy, liquidation or the financial inability to pay any insurer, reinsurer, risk retention group or captive in which the agency has placed or obtained coverage for the client. Some policies do have a carve-back clause stating that this exclusion does not apply if the insured agency placed the insurance with an entity having a specified A.M. Best or Demotech rating, or if the entity was guaranteed by a governmental body.
- Communicable diseases and COVID-19. This is a more recent concern for carriers and there are many variations in the policy language. But not all carriers are adding these exclusions, since policies do not cover bodily injury and the professional services must be deemed negligent for coverage to be applicable.
5) How Do I Choose the Best Carrier?
When looking to purchase a professional liability policy with E&O coverage, several things should be examined closely.
The financial strength of the carrier is very important. You do not want to face a difficult claim situation only to learn that your insurance carrier cannot pay the claim.
There are five independent rating agencies, including A.M. Best, Fitch, Moody's, Standard & Poor's and Kroll Bond Rating Agency LLC. Each agency has its own rating scale and standards. Their ratings often vary enough that you may want to consider looking at more than one agency's ratings. The rating agency used most frequently is A.M. Best.
Make sure to look for the coverages specifically needed by your agency. Since coverages and terms vary, it is important to review the policies to ensure that the services you are providing are covered.
Is the carrier admitted or non-admitted? An admitted carrier is approved by the state's insurance department. This means that they are required to comply with all state regulations and are overseen by the National Association of Insurance Commissioners.
A non-admitted carrier is not approved by the state, which means they are not required to comply with state regulations. It also means that if the insurance company is unable to pay debts owed, there is no guarantee that your potential claim will be paid.
But you will notice that coverage is not available in the admitted market for all exposures. High-hazard areas of practice or property locations may not have an admitted solution available to them. In addition, non-admitted carriers can offer speed, creativity and flexibility for a customized policy solution—something that is not found with admitted carriers.
It's important to do your homework before purchasing professional liability coverage to ensure that the policy you are purchasing is going to properly cover your agency in the event of a claim. Keep in mind that more than one policy may be needed to be fully protected. Before selecting coverage based solely on a lower premium, it's vital to consider other critical factors, such as the carrier's classification, financial strength, coverage terms and claims-handling capabilities.
Adrienne Woodhull is area president, Risk Placement Services Signature Programs.