A COVID-19 hangover. The hard market. The movement of policies from the admitted market to excess & surplus lines. Whether a single factor or a combination is to blame, one thing is certain: Errors & omissions claims are on the rise, requiring independent insurance agents to be even more vigilant.

“In the last six months, we've seen a significant uptick in both the frequency and severity of E&O claims," says Amanda Juratovic, Big “I" Professional Liability assistant vice president of E&O operations. “Swiss Re is doing a deep dive into the data to try to find the correlation, but so far, there is not just one clear reason."

Elizabeth Whitney, senior vice president and head of professional liability U.S. at Swiss Re, says repercussions from COVID-19 are still flowing through the market. “Claims slowed down during COVID, but now things are catching up," she says.

David Walker, president of Hartland Insurance Agency Inc., in Hartland, Michigan, and an expert witness for agent E&O carriers, says another factor could be the impact of remote work on agency procedures and protocols.

“When people are working on their own islands remotely, I think you're increasing the potential to become less focused on procedures," he says. “People might circumvent workflows because they're not around colleagues and there is not as much direct oversight."

The hard market is another factor in the increase in claims frequency, Whitney says. Coverages moving from carrier to carrier increases the likelihood of mistakes or changes in coverage not being communicated to the insured.

The hard market is also causing carriers to be both more restrictive about the terms offered and laser-focused on upholding the conditions of the policy, creating a higher probability for denying claims, Walker says. “When people sue, they aren't just going to sue the carrier," he says. “They're going to sue the agency."

“And while, ultimately, the carrier might have made the mistake, the agency must defend itself," Walker continues. “The frequency of agency E&O claims goes up because you still have to defend the claim."

Another byproduct of the hard market is the increase in the number of policies being moved to the E&S market. “As more business goes into surplus lines, we know there are more restrictions in coverage," says Nancy Germond, Big “I" executive director of risk management and education. “And if you don't outline those changes, it's an E&O exposure."

Agents find themselves relying more heavily on E&S to reach the coverage limits that clients now need. “I've been in this business more than 40 years, and I've never seen a situation where you have to build a liability tower at $5 million, but that's happening," Walker says. “That increases the level of complexity in getting the coverage written."

“Internally, your agency might not have the technical skills to build those towers and make sure that everything is 'stacked' correctly, which then increases the possibility for disputes, which could then lead to E&O claims," he adds.

What's Driving Agency E&O Losses?

The top causes of E&O loss have remained relatively consistent over time, according to Swiss Re, although they can be tied to current events.

Severe weather has “increased frequency and severity of natural disasters," says Karen Thurlow, vice president, professional liability claims team manager, Swiss Re. “Plaintiff attorneys are doing mass client solicitation following events like the California wildfires."

“Inflation and supply-chain issues are driving up costs to replace real and personal property," Thurlow says. “And increasing medical costs are impacting verdicts in personal injury cases."

“Our largest claims continue to stem from commercial property fire—inadequate limits, failure to schedule a building—and personal injury from umbrella excess—failure to schedule a vehicle, failure to recognize an exclusion," Whitney says. “Again, this ties to the hard market."

Here are five of the most common agency E&O pitfalls:

1) Failure to procure or give sufficient coverage. Failure to procure or give sufficient coverage continues to be the No. 1 loss driver, according to Juratovic. One example is a commercial property experiencing a total loss, such as a fire, before it being discovered the property had been undervalued.

Germond highlights the absence of flood coverage during Hurricane Helene. “Agents should never say 'you don't need flood coverage because you're not in a flood zone,'" she says.

“When you write the policy, don't rely on flood zones because they are notoriously inaccurate," Germond explains. “Same with wildfire zones—what if your insured happens to live right next to a wildfire zone? There are all types of issues with not offering these coverages."

2) Inadequate explanation of coverage details. This error can happen when an agent embellishes or misconstrues the coverage they are giving the client. “A client is going to depend on an insurance agent's professionalism and follow their recommendation," Juratovic says. “If the coverage isn't explained properly, it's going to be a big problem."

3) Administrative errors. Something as simple as incorrect data entry can lead to undervalued property or missed deadlines. “It runs the gamut," Juratovic says. “But administrative errors of any kind are the third largest driver of E&O claims."

4) Failure to identify and address client exposures. If an account in Florida doesn't get wind coverage and later there is a hurricane and, subsequently, a total loss, “you didn't properly insure your client," Juratovic says.

5) Failure to communicate policy changes. Changes in coverage when a policy moves between carriers, or a piece of business moves from the admitted to the E&S market, are not always being communicated, Juratovic warns.

Agents must also be vigilant in checking for and communicating policy changes, even when the policy is being renewed with the same carrier. “Sometimes a carrier will slip in an endorsement that is actually an exclusion, and it's vaguely worded," she says. “If you see anything you don't recognize, you need to drill down and figure out what the endorsement is doing to the policy."

Agency E&O Risk Management Strategies

Walker says E&O loss drivers and causes all boil down to a relatively simple risk management formula: Communication equals avoidance and documentation equals defensibility.

“If you have open lines of communication between all three parts of the triangle—the carrier, the consumer and the agency—you'll avoid miscommunication, which is a very common cause of errors and omissions," Walker says. “Open communication is a good avoidance strategy for E&O claims."

“But can I do everything right and still potentially get sued? Yes," Walker warns. “If things go sideways and something breaks down in the communications triangle, then the question is how good my documentation is, and that will in turn determine how defensible I am in a lawsuit."

E&O risk mitigation is rooted in proper procedures, Juratovic says. Here are six steps agencies can proactively implement to avoid E&O claims:

1) Procedure manuals. “The biggest gap we see, especially in smaller agencies, is not having a procedures manual," says Germond, who points out that some agencies shy away from putting their procedures in writing because it can be a double-edged sword.

“If you say, 'this is our agency's best practices' in a manual, there is a fear it could be blown up as an exhibit in court, so some agencies say they will just operate as is," Germond says. “We truly believe that is not the way to go. You should have a procedures manual."

The Big “I" offers members a downloadable procedures manual template at E&O Guardian. Agencies must update it with information specific to the carriers the agency uses.

Germond suggests putting together a small team of employees—perhaps someone on the frontline, someone in management and someone in claims—to take the procedures manual template and customize it to the agency's workflows.

2) Documentation. Proper documentation is the best way to protect your agency and yourself as an agent. “Your documentation is the star of the show," Germond says. “You can't over-document. If you can't document that you discussed it, and perhaps they signed a declination—or at least that you sent a declination form for that coverage—it's a problem."

3) Internal audits. “There has to be a process built in where the agency monitors who is working on a file to make sure they follow simple procedures," Juratovic says. Germond suggests taking a small sample size—perhaps three employees—and reconciling all their actions with the procedures manual. “Call it a best practices review," she says.

4) Checklists. A key way to prevent the top five E&O loss drivers is to consistently use a standard checklist for the line of coverage and then put it in the file, along with a declination or other formal documentation, Juratovic says. Checklists can also remind agents to offer coverage that should be included but may not be immediately top of mind.

“For example, for every bar and tavern you write—and probably every commercial account you write—you should offer active assailant coverage, because it can happen anywhere," Germond says. “Add it to your checklist."

The Big “I" offers coverage checklists for commercial property, workers compensation and other popular coverages at E&O Guardian.

5) Producer onboarding. The Big “I" offers a commercial lines producer onboarding kit that outlines best practices. Download the kit from E&O Guardian.

“If an agency doesn't have something like this in place, they need to put it in place and use it each time someone is hired," Juratovic says.

6) Annual coverage reviews. In the last couple of years, there has been a trend of property being “wildly undervalued," Germond says, pointing out that a recent study by researchers from the University of Colorado at Boulder and the University of Wisconsin-Madison suggests three-quarters of homeowners don't have enough insurance to recoup all their losses after a disaster.

Annual coverage reviews allow agents to ask questions like: What have you updated in your home? Have you added any square feet? Did you put in a pool? This information can provide insight into valuation or changes in exposure.

“What keeps me up at night is the failure of independent agents to have proper procedures in place and then to make sure those procedures are being followed," Juratovic says. “If each and every one did that—each and every time—we're going to significantly reduce the number of E&O claims both from a severity and frequency standpoint."

The E&O Implications of M&A

There have been a record number of independent insurance agency and broker mergers and acquisitions in recent years—and the impact is showing up in E&O claims. If an agency is considering an acquisition, think assets, not liabilities, to avoid E&O exposure.

“If you're buying assets and liabilities, you are opening up yourself, even if you have their loss runs," Juratovic explains. “You just have no idea what historically happened. The best situation for an acquiring agency is to purchase the assets only."

Post-acquisition, the buyer and newly acquired agencies need to focus on getting on the same page—and getting on the same agency management system (AMS). “You need to go in and make sure that the procedures you've laid out are implemented and implemented quickly," Juratovic says.

“Often, we'll see two years later the acquired agency is just now folding into the AMS. They have been working on two different systems with two different standards for years—this is a loss driver," she warns.

What Happens When an E&O Claim Hits?

While implementing comprehensive risk management procedures and documentation standards can go a long way toward preventing E&O claims, they can still happen. And when they do, the unsuspecting agency often doesn't know what hit it.

“It can turn an agency upside down," Juratovic says. “They take it personally, and there is so much you have to do to get through the claim. It's just really hard on an agency."

Walker agrees, noting that E&O claims can be an incredible distraction and have a detrimental effect on agency staff. “You have to be very careful of the impact on team morale if a mistake has been made," he says. “But you must stick to the facts. When I'm helping people prepare for a deposition, the one thing I'll tell every employee is to just tell the truth."

“You can't go back in time and fix a mistake," Walker says. “We're stuck with the facts we have. The only thing that can make an E&O claim worse is to lie."

If cautionary tale No. 1 is to be realistic about the mistakes that were made, then cautionary tale No. 2, Walker says, is to make sure the claims experience doesn't make the pendulum swing too far the other way.

“You can't have a situation where that E&O claim suddenly becomes a shadow and you're afraid to do anything," he says. “You have to be careful not to become paralyzed by it and say, 'Well, we don't want to do that because we might get sued.'"

Katie Butler is principal of Aartrijk.