Professional services firms are walking a tightrope between opportunity and ruin, which means errors & omissions coverage is essential.
Professional and financial services are in demand. Real estate is booming, accountants are waiting in the wings to address the fallout from COVID-19 and a new agenda on Capitol Hill, lawyers' offices are hiring due to pandemic-related legal obstacles requiring extra contract analysis, and architects will be busier as building owners assess how to redesign and build public spaces post-pandemic.
These businesses have weathered the COVID-19 storm particularly well. In general, they maintained a relatively low fraction of closures since March 1, 2020, according to the Yelp Local Economic Impact Report September 2020. This group—lawyers, real estate agents, architects and accountants—saw only two or three out of every thousand businesses close as of Aug. 31, the report found.
While these service providers are aware they will face professional liability exposures because of the services they perform, as many as 1 in 5 do not have errors & omissions insurance, according to The Hanover's Professional Liability Risk Report. This gap creates an opportunity for independent agents to review coverages and offer valuable risk management services.
Agents and Attorneys
It's been well-documented that the real estate market responded to the pandemic in the most 2020 way possible: unprecedentedly. Homeowners needed space for home offices and home-schooling setups and fled the cities in favor of less-crowded places. Boosted by a sustained period of low interest rates and a more streamlined transaction process thanks to technological advances, the real estate market is set to remain strong in 2021 with Danielle Hale, chief economist for realtor.com, projecting sales to grow 7% and prices to rise another 5.7% on top of 2020's already high levels.
“Our real estate agent clients have done record numbers in 2020," says Mohammed Ali (pictured below), principal, Alim Corporation in Evanston, Illinois, who started the agency to “take control of my own destiny."
The number of transactions has also caused attorney offices to hire additional help with reviewing contracts and disclosures. “Their volume has gone up significantly," Ali explains. “They've had so much business that small, three- or four-attorney shops have had to bring in part-time attorneys who had little experience in real estate."
The increase in business has created an increase in E&O exposure. However, “E&O is vital but there are a lot of attorneys who purchase the lowest cost coverage they can find before realizing that they don't have all of the coverages that they thought that they had," Ali says. “Real estate agents and small attorney firms are two places where I would highly recommend agents look to review E&O coverage because of the number of transactions."
Further, amid increased demand for services, every business has adapted. “Whether it was new offerings or a change to the way they deliver their products and services, these alterations opened businesses up to new exposures—exposures that require E&O protection," says Gregory W. Leffard, president, professional and executive lines, The Hanover.
“For nearly every business, the 2021 risk landscape will be drastically different than it was at the start of 2020," he says. “It's more challenging for service providers to meet contractual deadlines; some businesses have seen revenues fall and more businesses may be relying on independent contractors. All these areas bring new risks to the forefront."
“While much of the world is focused on the immediate and direct impact of COVID-19, its indirect effects, such as the state of the economy or the services offered by CPA firms, have potential long-term professional liability consequences that should be addressed now," says a report released last year by the Journal of Accountancy, “The Indirect Impacts of COVID-19 on CPA Firms."
While 2020 gave CPAs a reprieve when tax filing deadlines were extended, 2021 is already shaping up to be a busy year. With the election of a new administration in the White House and a shift in the balance of power in Congress, accounting firms will likely be navigating a raft of new tax legislation, assisting companies who received COVID-19 relief payments and helping clients understand employee benefit requirements amid potential health care reforms.
In 2021, “there will be litigation in the accountant E&O space," Ali predicts. He outlines a scenario where a client who received a Paycheck Protection Plan (PPP) loan due to loss of income based on their accountant's recommendation did not lose as much revenue as first thought. “It could turn out that a business actually had an increase in revenue, and they are going to have to pay back the PPP loan—and pay interest on it as well."
While the E&O marketplace overall has been largely unaffected by the pandemic, “insureds should always be proactive in reviewing their E&O exposures as part of their risk management assessment," says Sandra Tata, vice president of lead specialty liability, HSB. It is also important to remind clients that an E&O policy typically includes defense costs, which means that “if a client makes a claim, whether or not there is merit, the onus is on the insured to defend themselves, which can result in significant expense along with reputational damage."
“The virus isn't simply a health crisis; it is also a design problem," according to the June 2020 New York Times article, “How Architecture Could Help Us Adapt to the Pandemic."
Whether it's redesigning a museum to more safely allow people to flow in and out or creating an office space that meets recognized COVID-19 safety standards, architects, designers and engineers will have their work cut out for them this year. Complicating matters is the idea that what's considered “safe" is still a moving target as the scientific community grapples with the disease, adding to E&O exposures.
“The design industry, particularly with architects and mechanical engineers, has had a dramatic effect on how the 'space' changes to address COVID-19 issues," says Kevin Collins, managing director, design & construction practice leader, Victor. “Mechanical engineers are focused on airflow, HVAC systems and other strategies to help with [COVID-19] mitigation strategies."
“Previous trends toward open office plans now fly in the face of the need for social distancing, capacity and other health concerns," he says. “The industry as a whole is looking for the best way to address remote work effectively and how to get people back to their place of business safely."
The scope and nature of services offered by many professionals have rapidly evolved because of the pandemic. As a result, “professionals face a multitude of new risks, such as an acceleration in online contract usage, new virtual services previously conducted during face-to-interactions and a further reliance on new technologies," says Zach Vollmer, senior vice president, real estate E&O program manager, Victor. “E&O can serve to mitigate these risks and account for future unknowns as new legal actions begin to emerge."
No to E&O?
In the past two years, a significant number of non-buyers of E&O coverage experienced an incident that could negatively impact their business, according to The Hanover's “Professional Liability Risk Report," with 40% having experienced customers alleging non-performance of products or services and customers withholding payments due to contract disputes.
However, the report showed that 65% of professional service providers without E&O coverage reported not purchasing it due to a lack of awareness, consideration or follow-through—nearly a quarter said they intended to purchase it but hadn't.
“This shows independent agents can offer important guidance to this group of customers," Leffard says. “Proactively reaching out to customers to assess their risks and any changes to their operations can help agents identify potential gaps in coverage."
When payment is made to the plaintiff, the average cost of a claim in the Victor E&O program is around $120,000, which means agents need to have honest conversations with clients about the value of E&O coverage and the risk of not carrying it.
Another reminder for clients is that “E&O also protects one of any business owner's most valuable assets—time," says Elizabeth Whitney, head of agents U.S. at Swiss Re Corporate Solutions, the Big “I" Professional Liability Program partner. “Being able to report a claim or potential claim to their carrier relieves them of the incredible time and energy drain that occurs when defending a claim."
In a world that can seemingly change in a matter of months, if not weeks and days, agents should also outline the value of clients being prepared with broad E&O coverage to facilitate options to provide new services, as and when they're needed. “Even if an insured does not see the need for it now, chances are they will only engage in discussions with prospective clients that are savvy enough to require the insured to carry professional liability insurance before entering into a business deal," Tata says.
“Agents can also help clients to look at the issue from many different angles and lenses, such as the nature of E&O coverage being claims-made, which means that the ability to have a covered claim requires the firm to maintain an active policy," Collins says. “Every firm will consider the coverage from a different perspective, and agents need to have a comfort level with answering the need from the client's perspective."
Risk Management Value
In addition to not purchasing E&O insurance to address their exposure, non-buyers do not consistently adopt risk mitigation policies and procedures that can help prevent losses. As many as 44% do not use second-person review of work output, 35% do not use disengagement letters for terminating clients, and 26% do not use contracts or engagement letters, according to The Hanover's report.
Aside from the reputational and financial protections that E&O coverage affords, “much of the value lies in the risk management offerings provided through many professional liability programs," Vollmer says. “These additions not only serve to reduce risk for insureds, but can also help improve operations and processes, particularly for newer or smaller firms."
“The areas to especially focus on is indemnification clauses and limitations of liability," Tata says. “Closely review client contractual requirements, which often drive requests for professional liability policies" and “re-evaluate any guarantees or warranties of the benefits of all services provided to clients," she adds. “We are in an evolving operating environment, and there is no established legal precedent to help navigate us through potential liability."
The best way agents can help their clients is by educating them, Ali explains.
“Attorneys, real estate agents and accountants reach out to us all the time, because they want to insure their building or want to get workers compensation insurance, but they don't get E&O," he says. “They're like, 'Oh, we don't need this. We've been in business for 20 years and nothing's happened.'"
“I always say, 'E&O coverage is like a life insurance policy for a business,'" Ali adds. “You could be doing all the right things, but you consistently pay for that policy because you know that one day you will need it."
Will Jones is IA editor-in-chief.